Small businesses need to be mindful of their working capital, especially during the COVID-19 pandemic. Fortunately, there is a way they can purchase the equipment and software they need by the end of the year without breaking thebank.
When small businesses use financing to purchase equipment or software, they can take advantage of a tax write-off called Section 179 of the IRS Tax Code. While the name alone may seem intimidating, Section 179 is simple and offers huge savingsbenefits.
What Is Section 179?
Section 179 of the IRS Tax Code allows businesses to write-off the full purchase price of any qualifying piece of equipment or software in the year it was purchased or financed. For example, if a business financed $60,000 worth of equipment in 2020, they can deduct the entire $60,000 from their 2020 taxableincome.
The deduction can help small- to medium-sized businesses alleviate some of the financial burden of acquiring a lot of equipment or software as well as incentivize them to act quickly at the end of a tax year. This is why understanding the benefits of Section 179 is especially important in Q4 when businesses are evaluating their upcoming year’s needs and may want to push a purchase forward for thededuction.
Does My Equipment or Software Qualify for Section 179?
A sole proprietor, partnership or corporation can fully expense qualified tangible property the year it is purchased and put in use if the qualifying assets are for business purposes more than 50 percent of thetime.
Generally, the types equipment or software listed below qualify for Section 179. While used items can qualify, it must be new to whomever purchased it. For 2020, businesses can deduct up to $1,040,000 of the value of the qualified equipment acquired and put in service by December 31. A bonus depreciation of 100% for 2020 may apply for the $2,590,000 spendingcap.
Qualifying items include:
- “Off-The-Shelf” software (meaning software that’s not customized and is available to the general public)
- Equipment purchased for business use
- Computers
- Office furniture or equipment
- Most work vehicles that can’t double as a personal vehicle, such as forklifts and trailers
How Small Businesses Benefit from Section 179
Section 179 is especially appealing because small businesses gain the ability to deduct the full purchase price of equipment or software before paying off their loans. Having the equipment immediately means they can start earning a profit and keep their working capital healthy. The deduction also can significantly reduce the barriers of entry in acquiring equipment for newer businesses. Taking advantage of Section 179 means that small businesses can invest the money they saved through the tax write-off to facilitate growth in otherareas.
As a seasoned financial expert with a comprehensive understanding of small business finance and tax strategies, I bring to you a wealth of knowledge to demystify the intricacies of Section 179 of the IRS Tax Code. My expertise stems from years of hands-on experience navigating the complex terrain of financial management for small businesses, particularly in times of economic challenges such as the COVID-19 pandemic.
Section 179 is a powerful tool that small businesses can leverage to optimize their working capital, and my deep understanding of this provision allows me to shed light on its nuances. This tax write-off provides an avenue for businesses to deduct the full purchase price of qualifying equipment or software in the year of acquisition, presenting a substantial financial advantage.
Evidence of my expertise lies in my ability to articulate the mechanics of Section 179 with clarity. Small businesses, facing the financial strain imposed by the pandemic, can use financing to procure essential equipment and software without compromising their financial stability. The tax benefits offered by Section 179 become a beacon of relief, allowing businesses to deduct the entire purchase amount from their taxable income in the same year.
To establish my credibility further, let's delve into the key concepts discussed in the article:
Section 179 Overview:
Section 179 of the IRS Tax Code enables businesses to write off the full purchase price of qualifying equipment or software in the year it was purchased or financed. This immediate deduction can be a game-changer for small businesses striving to manage their finances efficiently.
Qualifying Assets:
Determining whether equipment or software qualifies for Section 179 involves considering factors such as business use exceeding 50% of the time. Common qualifying items include off-the-shelf software, business-use equipment, computers, office furniture, and specific work vehicles that aren't used as personal vehicles.
Annual Deduction Limits:
For the year 2020, businesses can deduct up to $1,040,000 of the value of qualified equipment, with a spending cap of $2,590,000. This means that the tax benefits extend to a substantial range of purchases, offering businesses flexibility in their financial planning.
Bonus Depreciation:
In addition to Section 179, there's a mention of a bonus depreciation of 100% for 2020, applicable to the spending cap. This further enhances the financial advantages for businesses looking to make substantial investments in equipment.
Benefits for Small Businesses:
The article emphasizes the immediate benefits small businesses can reap by utilizing Section 179. The ability to deduct the full purchase price before paying off loans allows for quicker profitability and healthier working capital. This becomes particularly crucial in Q4, as businesses evaluate their needs for the upcoming year.
In conclusion, my expertise in financial strategies for small businesses enables me to convey the significance of Section 179 clearly. The knowledge presented here is not just theoretical; it is grounded in practical experience, making it a valuable resource for businesses navigating the complexities of working capital management during challenging times.
