Paying business taxes is a complicated process for most entrepreneurs. That’s why so many business owners go out of their way each year to check changes that may affect them.
Those who have purchased new technology could end up saving money through Section 179.
Not sure where to start? Don’t worry, we’ve got you covered.
Let’s take a look at everything you need to know about the IRS tax code for tech purchases.
So, What is Section 179?
For those unfamiliar with tax laws, the name of this form can be intimidating. At first, it may sound like a policy that’s filled with convoluted rules that most people will have trouble understanding.
In reality, it’s relatively straightforward.
Section 179 declares that companies can deduct specific equipment and software from their gross income during the tax year they were purchased. This even applies to equipment that has been leased.
You can save a significant amount of money if your business requires expensive equipment to operate. In fact, the whole reason this tax code was created was to incentivize small business owners to further invest in their company.
Unfortunately, the US government has reduced the total amount of benefits that Section 179 provides. It’s been reduced in recent years. That doesn’t mean that it can’t still be a boon for many people who own smaller firms.
When Does It Come Into Play?
To better understand the circumstances around Section 179, let’s take a look at a brief example.
David owns an online clothing company and has recently decided to fulfill his customers’ orders in-house rather than outsource them to a third-party. After relocating to a new building, he began to think of what he needed to fulfill his orders most efficiently.
He decides to purchase multiple pieces of equipment, including an embroidery machine, a screen printing machine, etc. so that he could create his custom clothes himself.
His purchases total approximately $30,000. Under normal circumstances, David would likely be able to write off his purchase over a period of years. But, Section 179 allows him to deduct the entire cost from his gross income in one year.
What Are The Rules?
It’s not hard to tell that this tax code could be abused. So, hard limits have been put into place when it comes to the relief that it provides.
For the 2019 tax year, you’re only permitted to write off up to $1,000,000 in purchases. Depending on the size of your business, though, this limit often provides plenty of room to work with.
It’s also important to understand that since the purchases you write off are deducted from your gross income, it doesn’t make sense for you to buy equipment solely for the purpose of moving down to a lower tax bracket.
Yes, you may have to pay less money in taxes for that year, but you also would have spent a large portion of your income. This means that much of the money you saved can’t be spent on overhead costs like rent, utilities, etc.
For companies that are still in their early stages, though, every dollar counts.
Additionally, the purchase that you make must be used at least 50% of the time during your business’s operating hours. So, keep this in mind before purchasing expensive equipment that you only need to use a few times per month.
What Type of Purchases Qualify?
Section 179 is very generous when it comes to categorizing what business purchases can be written off. In fact, most purchases that a business makes for equipment and software fall under this tax code.
When it comes to vehicles, though, there are certain restrictions that apply.
Section 179 used to be known as the ‘SUV tax loophole‘ since so many companies were buying expensive vehicles while claiming they were for business use only.
This, of course, led to the IRS placing regulations on what vehicles can be deducted and what they’re used for.
As previously mentioned, you’ll need to use the equipment more than 50% of the time while operating your business. This makes luxury vehicle purchases an illogical decision unless you’re constantly on the road.
But, this also opens up a window of opportunity for investing in equipment like computers, servers, and other forms of technology that can increase your company’s efficiency.
For example, even something as simple as swapping out an outdated computer for a newer machine and operating system can increase the amount of work you’re able to get done within a day and offer you a Section 179 write-off.
Although Section 179 is relatively straightforward, it can still be difficult to determine if a purchase is worth making for your business. It can also be challenging to navigate the relevant forms when filing.
For those who aren’t completely versed in handling their business’s taxes efficiently, a reputable tax professional is a resource you should take advantage of.
Not only will they strive to save you as much money as possible, but they’ll also ensure that there are no mistakes or complications when you file. Since being on the IRS’s bad side is something that comes with plenty of difficulties; filing your taxes properly should always be prioritized.
Understanding IRS Tax Code for Tech Can Seem Difficult
But it doesn’t have to be.
With the above information about the IRS tax code in mind, you’ll be well on your way to ensuring that you save as much money as possible.
Want to learn more about the IRS’s Fresh Start program? This article has plenty of useful info.
Feel free to get in touch with us today to see how we can help make your business tax process go smoothly.