How to Lower Your Tax Bill by Using Section 179
Businesses have long used Section 179 of the IRS tax code to deduct the costs of equipment and software that they need to succeed. The federal government created this incentive to encourage companies to make the investments in their own growth.
Rather than requiring property to be capitalized and depreciated, which means the deduction is spread over multiple years, Section 179 allows you to deduct the full amount of qualified purchases up to $500,000 in the first year. Even if you finance, you can take the full deduction right away while you pay off the property.
For example, if you pay $50,000 for new machinery in your manufacturing plant and all rules are met, you can deduct the full amount in one shot instead of breaking it up over seven years or longer. This can save significant tax dollars and improve your immediate cash flow.
The PATH Act Permanently Extends Section 179
The problem has always been that Section 179 would be set to expire every two years, and taxpayers would wonder if or how they could deduct equipment purchases if the rules change. The Protecting Americans from Tax Hikes (PATH) Act expanded the deduction limit to $500,000 and made it permanent.
If total purchases for qualifying equipment exceed $2 million (a limit that is indexed annually for inflation), the $500,000 limit is phased out, dollar for dollar. If total purchases of qualifying equipment reach $2.5 million, you can’t use the Section 179 deduction.
For example, if you do a major technological overhaul and purchase $1.5 million in computers and networking equipment, you can write off $500,000 in the first year. If qualifying purchases total $2.2 million, you can only write off $300,000.
Unfortunately, the Section 179 deduction isn’t nearly as substantial in New Jersey. While New York, Pennsylvania and Connecticut follow the federal rules and allow you deduct up to $500,000 for qualified equipment purchases, New Jersey has established a limit of just $25,000.
Why You Need to Discuss Section 179 with Your Accountant
Not all equipment purchases can be deducted from your tax returns. Qualifying equipment includes manufacturing machinery and equipment, computers, furniture and fixtures, whether new or used. Off-the-shelf computer software and qualified leasehold and real property can also be deducted.
As with all things tax-related, the rules are complex. Understanding these rules and the tax implications before you make decisions about purchasing equipment can save you a significant amount of money and help you make smart, growth-oriented investments. Without this knowledge, the whole benefit of Section 179 can be wasted, resulting in a higher tax burden and possible cash flow problems.
While most businesses are on the lookout for ways to reduce their tax burden, Section 179 is more than a tax deduction. It can spur the kind of investment and innovation that build stronger business communities.