In our last blog post we talked about how depreciating assets can be used by your business to save on taxes.
This time around we are explaining how IRS Section 179 can be used by small business to write off 100% of qualifying equipment and software in the year of their purchase to save on taxes (in 2018).
What is Section 179?
Section 179 is an IRS tax code created to encourage small businesses to invest their capital into their own business. It allows a small business to spend up to $1 million purchasing or financing qualifying equipment and being able to fully write that equipment off in one year. The spending cap for equipment bought by any company is capped at $2.5 million. Meaning spending more will reduce the company’s Section 179 benefit on a dollar to dollar basis there after.
Important: Your company must spend less than $3.5 million that year in order to qualify for the Section 179 benefit.
Typically when a small business buys equipment, they must depreciate that equipment over a span of 5 to 7 years.
So if ABC company buys $100,000 worth of equipment (in most cases) it will write that equipment off using the straight line method, deducting it in equal amounts each year. So for a 5 year straight line depreciation, $20,000 will be written off each year.
So with this method, when $100,000 worth of capital is expenses by ABC company, only $20,000 can be written off in the year of the purchase. Then the $80,000 left over is potentially taxed at the appropriate income tax rate.
Section 179 increases tax deductions by allowing ABC company to fully write off that equipment as an expense.
- Equipment and Machines
- Tangible Personal Property
- Business Vehicles (Must weight more than 6,000 lbs)
- “Off the Shelf” Software for Computers
- Office Furniture
- Office Equipment
- Property Attached to your Building (Not apart of the original structure)
- Improvements to non-residential buildings (fire alarms, HVAC, roofing, security, etc)
Qualifying equipment can be new or used, but must be new to the owner. Any of these can be purchased, leased or financed.
Find out how much your business can save on taxes this year.