Make sure you are maximizing your deductions with this powerful SMB tool.
What is Section 179 Deduction?
Every SMB needs to know about Section 179. This section of the tax code is specifically designed to help mid-sized and down businesses save thousands — and even hundreds of thousands of dollars.
Section 179 Deduction is not mysterious or complicated. You’ll see why in a sec.
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means you can deduct the full purchase price from your gross taxable income.
The code is intended to incentivize businesses to buy the equipment they need and grow in value. Of course, some businesses started to abuse Section 179 a few years ago. Have you heard the term “SUV Tax Loophole?” or “Hummer Deduction?” Sure enough, these expensive vehicles were claimed under Section 179… until that loophole was closed. (See ‘Vehicles & Section 179‘ for current limits on business vehicles.)
However, this deduction saves more for its intended beneficiaries than ever in its history: SMBs.
How Large Is Section 179 in 2020?
Section 179 covers most tangible goods including ‘off-the-shelf’ software and Software as a Service (SaaS) applications including CRM, ERP, Word Processing, you name it.
Designed for Small and Mid-Size Businesses
Every SMB IT leader should know about Section 179 because it is one of the few government incentives available to small businesses. It is therefore a consistent location for SMB benefits. Take 2020 for example. Many of the recent Stimulus Acts and Congressional Tax Bills have touched on and revised Section 179 to help SMBs.
Large businesses do benefit from Section 179 or Bonus Depreciation, but these changes have delivered extensive tax relief to SMBs. Not just in theory either, businesses that take action are seeing significant tax benefits.
Section 179 Limitations in 2020 |
|
| Write-off Maximum | $1,040,000 |
| Total Equipment Phase-out begins* | $2,590,000 |
| Total deduction maximum | $3,630,000 |
| 100% bonus 1st year depreciation | 100% |
| Normal First year depreciation | 20% |
The deduction begins a dollar-for-dollar phase out at the $2,590,000 threshold, and there is no additional benefit after $3,630,000 in equipment purchases is reached
Sample Calculation
Let’s take a simple example to see how much businesses can save. Let’s say you buy $1,000,000 in software and equipment in 2020. This would mean that you could deduct the entire amount and save the 21% business tax (2020 rate), or $210,000 on that amount effectively reducing the expense to $790,000!
Section 179 Deductions Give IT Leaders More Financing Leverage
Be sure to check with your CPA/CFO, but Section 179 deduction can help justify equipment costs before the end of the year. You may already have equipment claimed under the tax code, so double-checking is always a part of the process.
Tax savings is a great way to start any IT investment discussion for one of many possible reasons.
Many businesses see tax benefits as a discount. If we expect IT purchases to add X amount of value to the business, and our return would be X minus cost of equipment, then the tax benefit is pure profit on top of that value-add.
Others are attracted to the cash savings. We need to dispense X to the vendor, but then tax incentives mean we get some of that cash back come tax time. This can lead to a more favorable cash position at year end.
Every business is different in the current financial position, so the way these benefits will be recognized will vary. But regardless of how this is communicated, Section 179 is a powerful tool for IT leaders to advocate for advanced tools that are often needed to keep the business competitive and secure.
