Like everything in the tax world, US Internal Revenue Code’s Section 179, which allows companies to deduct UP TO $500,000 worth of qualifying equipment purchased in 2013, contains multiple shades of black, white, and gray.
This accelerated depreciation deduction was implemented in 2008 specifically to provide much-needed tax relief for small businesses and encourage them to invest in their future. Typically, depreciation deductions are spread out over time, but Section 179 allows business owners to accelerate that advantage by writing off the entire cost of a purchase the year that they buy it.
In theory, Section 179 is actually quite straightforward. Yes, nearly everything from computers to off-the-shelf software to certain business vehicles to office furniture qualifies. If you’re dreading the impending death of Windows XP, Section 179 provides the perfect impetus to upgrade from the outdated OS, which Microsoft will end support for next April.
Section 179 does have limits, however. The total amount that can be written off is equal to the amount that you spend on qualified business purchases. Spend $500,000 and you can deduct $500,000 — only spend $10,000 and you can only deduct $10,000, though.
Also, if the total cost of equipment purchased exceeds $2,000,000, the deduction is reduced dollar for dollar. In addition, a business must show sufficient business profit to take advantage of Section 179. Only have $100,000 in profit? The maximum you can deduct is then only $100,000.
Now for the kicker: Section 179 can change without notice each year, and right now, the total deduction allowed is forecast to drop from $500,000 in 2013 to $25,000 in 2014. Unless Congress acts to extend the 2013 allowance, which financial experts don’t anticipate, the tax code’s 50% bonus depreciation offer will also disappear. That means if your business is considering a hardware or software upgrade, now is the time to take action — with the guidance of a professional tax advisor, of course*.
Minor exemptions do apply to software under Section 179. Generally, qualifiying purchases must be of the “off the shelf” or “out of the box” variety — custom code software, for instance, doesn’t apply. The other requirements are that the software is either financed via specified leases or purchased outright by you; that the software must be used in your business for income-producing activity; that the software must have a determinable useful life; and that the software must be available for purchase and subject to a non-exclusive license.
Another major Section 179 perk allows users to acquire UP TO $500,000 worth of equipment without actually spending that amount this year. With a properly structured capital lease, the amount you can deduct may actually exceed what you have to pay up front. Tread lightly, though, as many small-business leasing firms are notorious for applying outrageous terms to loans. CMIT Solutions can help you navigate this tricky landscape by leveraging the trusted relationship we maintain with our leasing partner, Marlin Equipment Finance.
If, after consulting with your professional tax advisor, you make Section 179-eligible purchases, actually taking the deduction on your 2013 taxes is relatively easy. You or your tax preparer must fill out IRS Form 4562, the deduction must be taken on an item-by-item basis, and complete records of your business equipment purchasing or leasing must be maintained. Also, you are now able to amend and elect Section 179 if you previously did not for tax years running from 2007 through 2013.
Remember: barring significant action by Congress, the Section 179 deduction will decrease from $500,000 to $25,000 as of January 1st. If you want to take advantage, you MUST purchase or lease qualifying equipment before December 31st.
Once you’ve consulted with a professional tax advisor about the benefits Section 179 could bring to your business, call or email CMIT Solutions to map out the hardware and software purchases (like upgrading from Windows XP) that are right for you. Who doesn’t want to reduce their tax burden AND upgrade their tech environment at the same time?
*Information dispensed in this QuickTip is for illustrative purposes only and accuracy is not guaranteed. CMIT Solutions and its owners, affiliates, and partners are not tax advisors, and no communications are intended to offer any tax advice. Please consult with qualified tax professionals concerning your situation.