How to Deduct Equipment Purchases from Your Taxes
The end of the year represents one of the most popular times to purchase new office equipment, and that isn’t because Christmas is around the corner. As the year draws to a close, forward-thinking companies are eyeing their tax liability and looking for ways to reduce it. In many cases, equipment purchases for the office qualify as tax write-offs. That’s because of a deduction created for small businesses. It’s called Section 179, and it’s a valuable tool for any company which needs equipment to operate.
Companies thinking about upgrading an office printer or investing in new technology solutions should strongly consider the implications of Section 179.
What Is a Section 179 Deduction?
According to the IRS, Section 179 allows taxpayers to deduct tangible property from their taxes when it is purchased for and put into use by a business during that same year. This is known as expensing, and it offsets the taxes owed by a company or individual. Designed specifically for small businesses, it incentivizes businesses to invest in themselves through the purchase of necessary equipment.
Businesses were already able to write-off depreciating assets such as electronics or vehicles. However, Section 179 simplifies and incentivizes equipment purchases by allowing companies to take a more significant tax deduction during the first year, rather than applying smaller amounts over several years. Section 179 caps deductions at one million dollars, and spending on equipment purchases at $2.5 million.
For example, a company that purchases a new printer for $500 has the option of either taking a $500 tax deduction on the first year and no subsequent years or taking a decreasing percent of that $500 for the next several years. Some years, such as 2019, also have a bonus depreciation that kicks in after the spending cap is reached.
If that sounds pretty amazing, that’s because it is. Section 179 has been so widely taken advantage of that it’s earned the nickname the “Hummer Tax Loophole” because companies were buying and writing off Hummers and SUVs. (The IRS has since closed that loophole, creating rules which ensure that only companies which need to purchase vehicles for work purposes do so.)
“Qualified Property” Explained
Section 179 hinges on the concept of qualified property. According to the IRS, this is a property that is tangible, depreciable, and personal but was acquired for business or trade use. Purchases which may qualify for a Section 179 deduction include:
- Business vehicles with a gross weight above 6,000 pounds
- Off-the-shelf software
- Office furniture or other equipment
- Tangible personal property that is used in a business
Specific improvements to non-residential buildings also qualify for Section 179 deductions. Examples of these may include security systems, HVAC, and fire suppression systems.
How to Take a Section 179 Deduction
Taking a Section 179 tax deduction is easy, provided that all of the criteria to qualify for the deduction are met. To take this deduction:
- Purchase the equipment and put it into use during the tax year. It’s only possible to take a Section 179 deduction on a qualified property that was purchased during the tax year.
- Maintain receipts and records of every purchase intended for Section 179. These records will be necessary when the company does its taxes or turns over its records to a tax professional, maintain records of the date of purchase, the date the property was put into use, and all associated costs which the purchase incurred, such as shipping or maintenance. These won’t be sent to the IRS but are necessary to keep on hand should the IRS require proof.
- Use the qualified property for business use more than 50 percent of the time. The IRS requires that the eligible property, whether it’s an equipment, a vehicle, or software, must be used in a business context for more than 50 percent of the time.
- Follow the instructions on Form 4562 to determine the Section 179 deduction amount. Depreciating qualified property may be subject to – or even more valuable – for other tax purposes. Use the worksheets provided to determine if a Section 179 deduction makes sense.
Make the Most of Your Equipment Purchases This Tax Season
The end of the year is a fantastic time to purchase new equipment for a business. As companies review their growth throughout the year, they’re beginning to plan for what the next year might bring. Equipment purchases made during this time have the advantage of this introspection as well as being a smart move to reduce the tax liability all businesses face.
The Section 179 tax deduction allows businesses to write off many types of equipment purchases to help offset their tax liability for the year. It was explicitly designed to encourage small businesses to invest in themselves by incentivizing these purchases. For companies considering investing in that new printer or productivity solution, now is the time to purchase and implement it to take advantage of the deductions it may bring next April.
Looking for ways to improve your productivity ecosystem while reducing your tax reliability next spring? Contact James Imaging Systems for a free technology assessment to discover opportunities for optimization.