Section 179 Deductions: How They Can Benefit Your Business
Tax reliefs incentives are essential for the growth of small businesses. Section 179 Deduction allows small businesses to deduct the total purchase price of specific equipment in that year instead of depreciating it. This means a business owner will have both an instant cut in taxes owed and also won’t have to worry about increasing these taxes in the future when these items are sold or disposed of. Section 179 only works for fixed assets other than land and real estate.
If you’re hearing about Section 179 deductions for the first time, this article is all about that. We define it for you and explain how you can take advantage of the tax deductions to scale your business.
What is Section 179 Deduction Code?
Section 179 Deduction is an Internal Revenue Code that allows small businesses to deduct the total purchase price of specific equipment in that year instead of depreciating it. For example, if you buy a four-year piece of equipment worth $30,000, you can deduct the whole amount from your taxes in one year instead of deducting $ 10,000 annually. The machine has to be put in use for section 179 deduction to be applicable.
This section applies to tangible property purchased by a business for long-term use, save for buildings and real estate. Examples of such property are vehicles, office property, computers, office furniture, etc. Intellectual property like patents and copyrights do not follow under this section.
Eligibility of Section 179 Deduction in 2021
Below are answers to the frequently asked questions as to the eligibility of Section 179 deduction;
1. Who qualifies for Deduction?
The definition of section 179 suggests that it only applies to small businesses. However, this definition refers to the value of property a company can purchase and the limitations on how much can be deducted rather than the actual size of the company. In short, this section applies to all businesses as long as the deductible amount falls within its provision.
For a business to qualify for this deduction in 2021, the spending cap is $2,620,000 on capital equipment, and only $1,050,000 of the amount spent can be claimed.
2. What makes a Property Qualify for Deduction?
For a property to qualify for the deduction, it must first be purchased for business use. Section 179 demands that property must be used for more than 50% of the time to qualify, and the business can only claim a deduction for the time it was in use for business. For a piece of equipment used for business, a claim of 100% on the total cost of the asset can be made.
3. Do Used Assets Qualify for Deduction?
Section 179 allows businesses to write off second-hand assets purchased by the company. The rule is that whether a property is new or used, it is deductible under section 179. The 50% rule on business use applies to these properties too.
4. What Expenses Support Section 179 Deduction?
Businesses can deduct up to $1 million of purchases for their trade or business. The purchase must be used in your trade or business, and it must make the production of income. Many categories of expenses qualify for the deduction, such as computers and other types of machinery, furniture, additions to buildings, and regional advertising, among others. Any payment that generates taxable income is deductible. Additionally, Section 179 can apply to landlords to the extent of assets used in the rental premises.
Difference Between Section 179 and Bonus Appreciation
There has been confusion among business owners on the difference between Section 179 and 100% bonus appreciation. These two are tax relief deductions for manufacturers who depend on assets on the operation of their businesses.
Bonus appreciation allows manufacturers to deduct 100% of the purchase price of the assets in the first year of buying the assets. The bonus appreciation program was passed by Congress in 2017 and is effective till 2023. The percentage will reduce by 20% annually after 2023. For instance, property placed at 100% appreciation will now be at 80% in 2023 and 0% by 2027. This program is subject to modification by Congress.
From its definition, Section 179, on the other hand, is an alternative that allows businesses to deduct expenses on assets purchased as soon as they get in service for that particular tax year.
The distinguishing factor between the two tax reliefs is that the 100% bonus appreciation can increase for one year, whereas the deduction under Section 179 is limited to the tax year.
Does it Matter on Which One to Claim On Your Assets?
Businesses operate in different unique ways, and it is critical to analyze the nature of a company before deciding whether to go for bonus appreciation or section 179 deduction.
Section 179 is effective for small or starting businesses whose profit margins might be less than the cost of equipment used for running the same company. For example, if the taxable income for your business is $40,000, whereas you used $60,000 to purchase equipment, then you have to apply for deduction under section 179. Additionally, section 179 allows deductions as long as the property is only used for 60% of your business.
The other advantages of Section 179 in a business over bonus appreciation include:
- Most state laws allow the application of section 179 over business appreciation.
- Section 179 can be used to adjust deductions on a financial year depending on taxable income.
- Section 179 is effective as it does not have problems relating to uniform capitalization (UNICAP)
- Section 179 allows deductions on improvements on equipment that may not qualify under bonus appreciation.
Understanding the two tax deductions programs provides versatility instead of settling for one method. Generally, when both 100% first-year bonus depreciation and the Sec. 179 deduction privilege are available for the same asset, taxpayers should claim 100% bonus depreciation since there are no limitations on that method.
360 Smart Networks Can Help
Many small and medium businesses are recognizing the huge benefits that Section 179 deductions have to offer. At 360 Smart Networks, we can help your business take advantage of these deductions and reap big tax savings while at the same time enjoying the best IT services in Metro Atlanta and Charlotte.
Contact us today to learn more.