written by Mark Veldhoff posted on Nov 15, 2021
Reaping off Section 179 Benefits for Your West Michigan Small Business
Businesses can take an immediate tax reduction on business expenses related to depreciating assets such as appliances, automobiles, and software under Section 179 of the Internal Revenue Code. Instead of capitalizing on an asset and losing its value over time in future tax years, this allows your enterprise to minimize its current-year tax obligations.
As per the Internal Revenue Service (IRS), the maximum amount you can opt to claim for most section 179 property you put in service in tax years starting in 2021 is $1,050,000, with the total price of the equipment acquired being limited to a ceiling of $2,620,000. To qualify for the Section 179 deduction, you must deploy your machinery, cars, and software to business operations over 50% of the time. To calculate the monetary amount eligible for Section 179, multiply the price of the equipment, automobile(s), and/or software by the rate of business utilization.
Many people believe that the Section 179 tax system is difficult to understand. However, this kind of thinking may cause your company to lose out on possible benefits and perks. The Section 179 tax code is relatively simple to comprehend and allows you to save money by investing in your company. Envizion IT is an IT managed services firm out to help you save money while delivering essential IT services. Let us break down section 179 and outline the various areas you can benefit from.
How Section 179 Benefits Small and Medium-Sized Enterprises
Small and medium-sized businesses must significantly invest upfront and continue to invest to achieve optimal growth and prosperity. Acquiring or upgrading office equipment is one of the most primary methods to invest in your company. While this is vital to ensure higher quality and more efficient work, it can be costly. There are, however, ways to make big purchases to suit your budget while still increasing your profits.
Small firms stand to gain the most from Section 179 since they will be able to deduct the full cost of equipment or software before dealing with their debt obligations. Having the equipment immediately implies that they can start making money right away and maintain a strong working capital. The deduction can help lower the entry barriers for newer enterprises when it comes to purchasing equipment. Small firms who take advantage of Section 179 might invest the money they save from the tax deduction to help them grow in other aspects.
How Section 179 Works
Reaping Section 179 Benefits involves a simple three-step process:
1. Have an Eligible Asset
Your asset must meet the following criteria to qualify for a Section 179 tax reduction:
Tangible. Section 179 applies to tangible goods such as office appliances and computer software. Copyrights and patents, for example, are not tangible assets. Buildings and land do not qualify, although some building-related equipment, such as fire suppression systems, security systems, and air conditioning systems do.
Unaltered software. This refers to software that has not been customized and is available to the masses.
Purchased. Leased property is not eligible.
Over 50% Business use. An asset that is predominantly utilized for personal purposes but is also used for commercial purposes is not eligible.
Not obtained from a related entity. Siblings, marital partners, parents, progeny, and enterprises, partnerships, and other parties with which you have an established relationship are all included as related entities.
2. Initiate Asset Use
To take full advantage of the Section 179 deduction, you must begin deploying the asset in your firm’s operations. For instance, if you acquire an appliance at the tail end of 2020 but don’t use it until 2021, you will have to roll over your deduction to 2022.
3. Claim the Tax Deduction
Once you’ve verified possession of an eligible asset and started using it, you can proceed to claim your tax deduction. Section 179 claims are made in the first part of Form 4562. The claim will go along with a description of the asset, expenditures on it, and the amount of tax deduction you are claiming for that item on Line 6.
Section 179 Limitations
The Section 179 deduction is subject to a few restrictions.
1. Deductions begin to fade after an expenditure of $2,500,000
You can claim a maximum of $1,050,000 in eligible property in 2021. Any spending above 2,620,000 on eligible assets will be reduced on a sliding scale.
2. Your Net Income is the Ceiling
Your Section 179 deduction is also capped to the net annual profits of your firm—you can’t claim more deductions than your earnings. When your net income is at $70,000 before claiming the tax write-off, and you have $100,000 in eligible property, your deduction is restricted to $70,000. If this is the case, you can choose to depreciate the remaining assets on a regular tax framework.
Since you didn’t generate enough revenue that year, you got shortchanged of $30,000 in Section 179 deductions. But all is not lost. As long as your net earnings allow it, you can rollover the $30,000 deduction to the following year.
Claiming Section 179 on Automobiles
Automobiles are subject to one additional limitation under Section 179 expensing. A previous quirk in the regulations permitted firms to write off the entire cost of huge SUVs. Lawmakers soon established expensing car limits to close this loophole. As such, deductions on vans, passenger cars, and trucks were capped at $11,160 and $11560 for tractor-trailers.
Vehicles eligible for the full Section 179 deduction include:
• Hotel or airport shuttle vans with seating for nine or more passengers
• Cargo vans with a completely enclosed driver’s cabin with no passenger allowance outside the driver’s compartment.
• Heavy-duty construction machinery
Taking full advantage of the Section 179 deduction can save your small business a lot of money on taxes, especially if you opt to buy essential equipment and machinery before the end of the year. Before making any major changes, consult your CPA or tax expert to see how it may affect your deductions. You can also reach out to us for further guidance on section 179 and other managed IT services.
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