Most businesses use some type of equipment, whether it’s a smartphone or a jetliner. Large corporations can usually purchase their equipment when they need it, but small and medium-sized businesses can face serious challenges in financing, maintaining, and upgrading the tools they need to stay in business. Section 179 deductions, and others like it, are lifesavers to the average business, but they can be tricky to apply and difficult to comprehend. This quick guide will explain this IRS provision, who is eligible, and how you can claim this deduction.
Section 179 Deduction Explained
The section 179 deduction is not some arcane deduction you can only use in obscure situations; it can apply to many small businesses. It is a section of IRS tax code that gives companies the option of deducting the total price from their gross income of any qualifying equipment they purchased during that tax year. It has enabled many small and medium-sized businesses that wouldn’t have been able to otherwise. Businesses before could only deduct a portion of their equipment cost each year, making it harder to purchase more equipment and upgrade what they already owned. The confusion sets in when determining what types of equipment and businesses qualify, the limitations, and how depreciation factors in.
Fundamentals of Filing for Section 179 Deductions
According to the National Federation of Independent Business (NFIB), in January 2020, 63% of small businesses made capital outlays for the acquisition, repair, or upgrade of some piece of major equipment. This is about average; most companies must make these types of purchases to remain competitive. The IRS recognizes the challenges involved in making such a significant recurring expense, and in an effort to reduce costs to the taxpayer and encourage them to keep improving their businesses, the agency introduced Section 179. They can be helpful and a wise decision for any small business, but it’s vital to understand the fundamental features of this deduction before making a major purchase with the intent to use it. Here are some parameters:
Equipment Considered Qualified by the IRS
“Equipment” is a broad term in tax law. It includes tangible property (something you can visibly see and touch) of any value with a life expectancy of over one year. It could be a smartphone, hand tools, office furniture, a vehicle, a 3D printer, or software. It could be any material thing used in the process of doing business.
Businesses Considered Qualified by the IRS
Any company that made less than $3,670,000 in purchases of equipment in a year is eligible for the section 179 deduction. New or used business equipment acquisitions can be purchased, leased, or financed.
Usage Requirement
The business property must be used at least 50% of the time for a business purpose to be eligible for the deduction. Personal property that is occasionally used for a business purpose is not eligible.
Related-Party Requirement
The company cannot acquire the equipment from anyone related to a business owner. Spouses, parents, siblings, cousins, and grandparents are all included in that restriction, as are any charitable organizations and trusts that the business owners have a relationship with.
Some Types of Property Can’t Be Deducted
Patents, copyrights, and other intangible assets cannot be deducted. Real estate and buildings also do not qualify for the deduction. Repairs and maintenance such as fire alarm systems, HVAC, roofing, and security systems are deductible, however.
Immediate Use Is Required
The IRS wants you to use the equipment as soon as you get it if you intend to deduct it in the year you bought it. If you buy something this year but don’t use it until next year, you can’t take the deduction until next year.
There are many purchases that still qualify, even after factoring in all of these restrictions. Section 179 can change the monetary equation for many small businesses holding off on a piece of equipment they need.
How to Claim a Section 179 Tax Deduction
The first step in taking advantage of this deduction is to make sure your purchase qualifies. Do the research before you purchase so you don’t find out later that you can’t use the deduction. Another smart consideration is whether you need the deduction this year or in the following years. Taking the full deduction the first year may not make the most sense for your business. The actual steps for claiming the Section 179 tax deduction are as follows:
1. Purchase Equipment That Qualifies
Purchase a piece of equipment that meets the parameters above.
2. Meet the Usage Time Limit
The IRS requires the company to use the newly acquired business equipment within the year it was purchased.
3. Keep All Records
You will need receipts of purchases and any related expenses, such as freight and setup costs, when you file for the deduction.
4. Use IRS Form 4562
You must elect to take the section 179 deduction; it is not automatically presented to you. Claim the deduction by using IRS Form 4562 and including it when you turn in your business tax return.
The section 179 deduction is straightforward, but that doesn’t mean it can’t be tricky, especially when it comes to timing and knowing exactly how to make the deduction work for your situation. Tax professionals can help with any questions, and their counsel could mean a difference of thousands of dollars when your business needs it most.
Ask for Professional Help When You Need It
Taxes are complicated, especially if you own a small business. Silver Tax Group has a skilled team of tax attorneys who can assess your business and find any advantageous deductions or other tax provisions that apply. They will also defend you if the IRS pushes back. Reach out and contact us to speak to a tax expert about Section 179 deductions or any other tax matters.
