One of the greatest advantages available to small businesses is Section 179 of the IRS tax code. Many people think that Section 179 is complicated and hard to understand, but it’s really not. Let’s break it down and show you why that software technology purchase this year is a good idea.
You can think of Section 179 of the IRS tax code as a big tax incentive from the US government to invest in your business. Section 179 permits organizations to deduct the full cost of qualifying software or equipment purchases that are bought or financed during the tax year. What does that mean? You can deduct the full cost of almost any equipment or software you purchase in calendar year 2020 from your 2021 gross income, helping lower your overall taxable income significantly.
Today, Section 179 is one of the most beneficial incentives available to small businesses. It’s been increasingly popular in recent Congressional Tax Bills, with millions of small businesses advocating, taking action, and seeing real, immediate benefits.
Without Section 179, you’d have to write off your big technology purchases over several years (usually five) rather than in the same year you purchase it. This can make it tough for small businesses to invest in big technology and hardware purchases that could significantly improve their efficiency and operations. That means you don’t have to wait to make equipment and software purchases. You can take that entire tax deduction now, rather than spread over five years.
Typically, when your business bought equipment or software to use in your day-to-day, your accountants ‘wrote it off’ little by little through depreciation. Now, that’s better than no write-off at all, but many business owners would like to take that write-off all at once during the year they bought the equipment. Here’s a quick example.
Let’s say that you spend $10,000 on software and services from an awesome company. Without Section 179, you’d write off $2,000 each year for five years, lowering your taxable income by $2,000 next April. Pretty cool.
With Section 179, you can write off that entire $10,000 purchase this year and lower your taxable income by a huge $10,000 in April 2021. That’s incredible!
Of course, there are limits – for most small businesses, the 2020 maximum amount that can be written-off for qualifying equipment/software is $1,040,000. That still leaves you plenty of room to upgrade equipment and software like cloud services to take advantage of this tax break before December 31, 2020.
Like most parts of the IRS tax code, Section 179 can be complicated. Here are our two biggest tips: