IRS Section 179 deductions for qualifying property is one way the government promotes reinvestment of small or medium companies into equipment and technology.
This section of the IRS code allows businesses to deduct the total cost of qualified depreciable assets purchased in a single year (up to a limit) from their tax returns.
This means instead of using depreciating allowances over several years, companies can invest in new equipment and technology regularly.
Since the passing of the Small Business Jobs Act in 2010, buildings are now also eligible for deductions under Section 179’s savings in 2020.
Often cited with Section 168(k), firms can make use of both allowances in the same year, leading to accelerated investment from small businesses that help the economy.
How Does IRS Section 179 Work?
For companies that want to make use of the deduction, they’ll need to follow the process described below.
- The company purchases qualifying property this year and puts the equipment into service before 31st December 2020. It’s important to keep records of the purchases, including the freight, setup, or installation costs.
- After forwarding the records to the company’s tax professional, they’ll add up all the costs and determine the total deduction amount.
- Using IRS Form 4562, the company elects to use the Section 179 deduction and includes the allowance in their tax filing for this year.
- The company’s tax professional calculates their taxes for 2020 and deducts the allowance from their annual tax burden.
Annual Limits of IRS Section 179
The limits change from one year to the next, with 2020 seeing a slight increase over the 2019.
Currently, the write-off limit for 2020 is $1,040,000. It applies to both financing, purchasing, and leasing qualifying equipment and software, helping companies acquire new technologies and recuperate the costs in the same year.
After a company spends $2,590,000 in 2020, the deduction phases out on a dollar-for-dollar basis and caps the entire Section 179 and 168(k) allowance at $3,630,000.
Bonus Depreciation with IRS Section 168(k)
Bonus depreciation falls under Section 168(k) of the code, and in 2020 it’s being offered at 100%. In a change this year, bonus depreciation includes used equipment as well new equipment.
This further helps companies use their technology purchases for a reduced tax burden. This section only comes into effect after the company applies Section 179.
Bonus Depreciation is useful to businesses spending more than the Section 179 spending cap ($2,590,000) on new-to-you equipment. Businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation—unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
Example Use of Section 179
Under these deductions, a company can invest in new equipment this year and include the total cost of the purchase as a tax-deductible expense.
For instance, if the company is relying on legacy printers, desktop workstations and outdated network infrastructure, and they spend $200,000 on digital office infrastructure, the actual cost will be $130,000.
This assumes a tax bracket of 35% applies, helping the company save $70,000 on their annual taxes.
Note that the same deduction applies whether the company opts for direct investment, financing the purchase, or leasing devices from suppliers.
What Section 179 Means for Your Business
Since the early 2000s, the limits of Section 179 and 168(k) have increased due to the effectiveness of the program.
It’s not clear how long the government will continue running the program, so SMBs should make use of the allowances while they are available.
Modern technologies continue to help companies streamline the operational process for greater revenue and improved business sustainability.
With the Section 179 program, they can reduce the costs associated with their digital transformation strategies.
Qualifying Property for Section 179 Deductions
The list of qualifying equipment, technology, and other property available in Section 179 seeks to help businesses modernize operations and find efficient solutions for their daily workflows.
Section 179 qualifying property includes:
- Qualified computer equipment and software
- Property listed under the MACRS System (Modified Accelerated Cost Recovery System) with a recovery period of no more than 20 years
- Water utility properties
- Specified plants
- Qualified improvement property
- Qualified film and television productions
- Qualified live theatrical productions
- Other listed property
While buildings may fall under Section 179, it depends on the circumstances and utilization of the building or facility within the specific financial year.
Section 179 and Software Purchases
The qualified list of assets also provides for software purchases. More SMBs are using their allowances to improve the software systems they use daily.
The qualifying criteria for software require it to be COTS (commercial off-the-shelf) products and be used for income-producing activities.
Custom software doesn’t fall under Section 179, and databases only qualify if incidental to the successful operation of other qualified software.
Takeaways From Section 179 Tax Allowances
- Covers a variety of investments: Companies can opt to lease, finance, or directly purchase the equipment and still apply for the deduction
- Applies only to 2020: All qualifying assets need to be purchased and put into service between January 1st and December 31st of 2020
- Bonus deductions are available: After the Section 179 allowance limit, there’s an additional Bonus Deduction available for more savings, typically used by larger businesses
At Impact Networking, we’ve been helping businesses implement the equipment they need to succeed and have a track record of success going back over 20 years. To learn more about why Impact is an indispensable technology partner to 1000s of clients, take a look at Our Approach.