How You Can Cash In On Section 179 Tax Deductions
Owning a small business can often feel like you’re on a roller coaster, filled with ups and downs, twists and turns and fast times and slow ones. As of late, thanks to a vibrant economy, the ride has been fairly smooth. In fact, according to polling conducted by Gallup, roughly 70% of respondents said they were feeling optimistic about where their business was headed and had things to look forward to.
Filing taxes, generally speaking, is usually not one of them. However, you can take some of the sting out of this annual chore with the Section 179 tax deduction. If you’re new to owning a company or have heard of this break before but weren’t sure about the particulars, here’s what you need to know to get on the fast track to saving some extra cash to keep your company humming.
What is the Section 179 Deduction?
Included in the Tax Cuts and Jobs Act, which was signed into law as 2017 came to a close, Section 179 enables small-business owners like yourself to reduce how much you owe in taxes by writing off certain business expenses that were made in the previous tax-filing year.
As you well know, the day-to-day costs associated with running a business are hardly a drop in the bucket. Aside from the purchases you make regularly for inventory and supply chain purchases, you never know when equipment will break down or a unique opportunity will arise entailing an investment. Every extra dollar comes in handy to increase cash flow and prepare for financial emergencies, making taking advantage of Section 179 well worth the effort.
What business costs are eligible?
Of course, not every purchase qualifies for Section 179. As noted by the IRS, they can only be applied to purchases made after 2017 (even though the TCJA was signed in December of that year) and for purchases that fall under the “tangible, depreciable personal property” umbrella and “acquired for use in the active conduct of a trade or business.” These include, but aren’t limited to, the following:
- Business-use automobile, like a passenger vehicle, truck or van
- Machinery and equipment
- Business personal property
There are a few caveats to these business-use items that require more elaboration. For example, vehicles can only be claimed as a tax write-off if the car weighs more than 6,000 pounds, The Balance reported. Additionally, “business personal property” refers to pretty much any possession that isn’t connected to a building. Office furniture, sheds, computer desktops and laptops, night tables, dentist chairs - they check the box necessary for Section 179 eligibility. Here are a few examples of small-businesses that often take advantage of this deduction:
- Accounting offices
- Health and fitness centers
- General contractors
- Marketing firms
- Hair salons
In short, if you don’t think your small business is eligible for Section 179, think again. It’s very likely it does, at least for some purchases. Even if your expenses involved refurbishing, whether that entailed physically expanding the size of your facility, the internal structure or made “qualified improvements” - like for heating, air conditioning, ventilation, fire resistance and security - the Section 179 write-off likely applies to your situation.
Up to how much can you deduct?
Just as there’s a limit as to when you make these purchases - and what they actually are - the same goes for how much you spend on these items and/or improvements. Previously, the maximum was $500,000. That was raised to $1 million with the passage and signing the TCJA, specifically for qualifying capital property purchases, but has since been increased again, now at $1.04 million, according to Section179.org. The phase-out limit - which is essentially the equivalent to a grace period but in terms of dollars and cents - was also increased. It’s now $2.59 million from $2.5 million and $2 million before that. These totals are subject to change in the years ahead, based on inflationary pressures.
Things to keep in mind
You know those disclaimers that you often see in small type on the bottom of the television screen or advertising material? Tax law is often similar to that, as there are so often caveats and disclaimers that can misconstrue your understanding of what is and isn’t deductible. The Balance Small Business points out some of the issues to be aware of before you start to add everything up:
- Deduction amounts decrease beyond $2.59 million: As aforementioned, the phase-out limit is $2.59 million, but that doesn’t necessarily mean that’s the cut-off point. Business expenses beyond $2.59 million may still be eligible, but the percentage return will be lower.
- Don’t need to take deduction total at once: Say cash flow is good at the moment and you want to plan for the future by only deducting a portion of the purchases that qualify for Section 179. You can do that if you’d like. In other words, if you’d like to receive the proceeds of the deduction over time - which usually means however long the property is in regular use - that shouldn’t be a problem. Some restrictions may apply, which is why you may want to consult with a tax professional if this is something you’d like to do.
- Both new and used equipment is eligible: If the equipment, automobile or machinery you purchased is used, you remain eligible for this tax write-off. Just be aware of the fact that the deductible amount may be less, as used equipment typically costs less to purchase.
- Must have used property within the year of purchase: It’s not unusual for small-business owners to buy equipment and wait awhile before they actually start using it. If it remains unopened, it may not count as a Section 179 deduction. In short, it has to be purchased and placed into service within 12 months of each other
As you look back on the year that was and your business expenses, you can prepare for the future by financing your equipment through Select Funding. We can help you build a better business so it’s geared for success. Contact us today.