What is Section 179?
For starters, the name is in reference to Section 179 of the IRS tax code. It allows small to medium-sized businesses to deduct up to $1 million worth of qualifying equipment or software from their net income if it was purchased or financed within that year (January 1 to December 31st). The goal of deducting the total depreciation expense of the equipment within the current year is to reduce a company’s taxable income and leave incentives for more purchasing in the future by optimizing cash flow.
How does Section 179 work?
Simply put, if you purchase $1,040,000 or less in equipment in 2020 you can write off the entire amount and preserve your cash flow. The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify. The maximum deduction a business can take for 2020 is $1,040,000, and for most small businesses, this is well more than what’s generally purchased in a year, which leaves room to have the entire purchase written off. Especially given that the deduction amount increased $40,000 from last year. There is also a spending cap at $2,590,000. After the cap is reached, the deduction begins to reduce on a dollar-for-dollar basis and becomes obsolete once $3,630,000 in equipment is reached. This ensures that the benefits are for small to medium-sized businesses.
Section 179 applies for qualifying equipment and software. Some software does not qualify, which includes custom-written software, databases (unless it’s in the public domain and incidental to other qualifying software), and websites. Section 179 does not account for land, inventory, permanent structures attached to the land or property, air conditioning and heating units, or any equipment operating outside of the US.
What does Section 179 mean for my business if I lease?
Think about it this way. Your business would be able to deduct the full cost of the equipment without paying the full amount for it in that year. For example, if you leased and started using a piece of equipment right before the end of the year and take the Section 179 deduction, you would reduce your taxable income without making any payments. The tax savings alone is likely to leave your bank account in better standing than if you never financed the equipment to begin with.
Does my business qualify for Section 179?
Assuming that your small to medium-sized business spends $2.5 million or less on a purchase, finance, and/or lease of equipment it should qualify for the Section 179 Deduction of that tax year. Also, 50 percent or more of your equipment and/ or software must be for business use to be eligible.
If you have more specific questions in regards to Section 179 talk to your accountant.
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