Yes, computer and technology purchases increase near the end of the year—and no, it isn’t just because of holiday sales. As businesses face the annual filing of their taxes, many consider ways to reduce their liabilities. And year-end equipment purchases allow companies to claim significant deductions—as long as the rules are followed.
After fluctuating several times over the last few years, Section 179 of the IRS tax code now provides a maximum deduction limit of $1 million for tax years beginning after December 31, 2017. Section 179 allows for the immediate expensing of equipment, as long as the equipment purchase is put into service by December 31, 2018.
This accelerated depreciation deduction was originally implemented in 2008 as part of the broader stimulus package, which provided much-needed tax relief for small businesses while encouraging them to invest in their future. It went up and down several times over the years and was supposed to drop by 40% in 2018 before the United States House of Representatives raised the limit in early October, doubling it from the previous $500,000 deduction limit.
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 operates in a simple, straightforward manner. Many types of office equipment qualify, from computers to servers to off-the-shelf software, printers, and other devices. Even office furniture and certain business vehicles can be deducted, as long as they meet certain requirements.
The total amount that can be written off is equal to the amount that a business spends on qualified purchases—spend $1,000,000 and you can deduct $1,000,000. But if you only spend $10,000, you can only deduct $10,000. Like all things associated with the US tax code, there are quirks about Section 179.
The so-called “phase-out threshold” is $2,500,000, meaning that a business can spend up to that amount in total equipment before the $1,000,000 limit begins to be reduced dollar for dollar. In addition, a business must show a sufficient profit to take advantage of Section 179. Only have $100,000 in profit? The maximum you can deduct is then only $100,000.
Another part of the Section 179 deduction allows business owners to acquire their equipment without actually spending the amount in question this year. With a properly structured capital lease, the amount you can deduct may actually exceed what you have to pay upfront. 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.
Since equipment must be purchased and put into use in the same tax year as its depreciation is deducted, the next few weeks are critical if you want to take advantage of Section 179’s $1,000,000 deduction for your 2018 taxes. If your business is considering a critical hardware or software upgrade, now is the time to take action—with the guidance of a professional tax advisor, of course.*
If, after consulting with your professional tax advisor, you make Section 179-eligible purchases, actually taking the deduction on your 2018 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.
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 that are right for you. Some states are even beginning to provide tax credits for cybersecurity investments; in Maryland, the Cybersecurity Incentive Tax Credit allows small businesses with less than 50 employees to claim a state income tax credit equal to 50% of the cost of cybersecurity solutions purchased from eligible Maryland cybersecurity providers, up to a maximum of $50,000.
Contact CMIT Solutions now to decrease your tax burden for 2018 AND provide a productivity and security boost thanks to new technology implemented with your business and its needs in mind.
*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.