As Americans wrap up 2020, business owners and operators have taxes to consider as they close out the calendar year.
IRS Section 179 is worth paying attention to. Here are the frequently asked questions on IRS Section 179 savings, calculations, and regulations.
What is Section 179?
Prior to this tax code’s creation, a business would have to write off a piece of equipment over its typical recovery period. In other words, when a company procured a piece of equipment for $200,00 that would depreciate over the next five years. The business would have been permitted to deduct $40,000 of the purchase price during the year it was acquired, followed by another $40,000 annually for the next four years. This stipulation was a challenge for businesses to buy the necessary equipment.
Thanks to Section 179, a business now has the ability to deduct the entire $200,000 purchase during the same calendar year that it was obtained.
Section 179 is an incentive that offers small businesses a tax write-off for the purchase price of specific equipment in the same year it was purchased.
What was the Motivation for Section 179 to be Created?
Section 179 was introduced by the Internal Revenue Service (IRS) as a small business incentive, and to boost the United States’ economy. Businesses who participate in utilizing Section 179 deductions aren’t spending less in taxes, they are saving capital in the same calendar year when the investment was made. This tax code gives small businesses an advantage to procure what they need, but not withhold money from total tax revenue.
What Equipment is Eligible Under the Section 179 Tax Code?
Check with your tax advisor/consultant to determine if your purchases qualify.
Here are a few examples of eligible equipment:
- Heavy equipment, tools & machinery
- Office & computer equipment / furniture
- Software that is purchased “off the shelf”
- Certain types of Vehicles (for business use)
A simple way to think about it is if the equipment meets the criteria as a depreciable asset (i.e loses value over time) under Section 168, and it is purchased for business use, then it should be permitted.
Can Section 179 be used for Financed or Leased Equipment?
In the majority of cases for financed or leased equipment, the complete price to purchase equipment is allowed to be deducted in the first year. This is a perk for companies, since they can enjoy the entire deduction. The IRS deems a lease to be a financed purchase, therefore this coverage does not include equipment that has been rented.
How does a Business Apply the Section 179 Tax Deduction?
Between now and December 31, 2020, if you anticipate cashing in on Section 179 benefits ensure that your purchase qualifies.
Talk to a qualified CPA to make sure that your business’ tax circumstance makes the most sense by taking a full deduction in 2020.
These are the basic steps for using Section 179’s tax deduction:
- Purchase a tangible, real property, or make improvements to real property (under the qualified list).
- Put the qualified property into service during the same year you would like to use the deduction.
- Complete the worksheet on IRS Form 4562, and follow the instructions.
- Use Form 4562 with your business tax return.
It’s essential to work with a CPA who has experience with depreciation and deductions to avoid unnecessary errors and penalties. They will also be able to identify which purchases are eligible.