Tax season is a topic that can make anyone break into a cold sweat. But thanks to the IRS Section 179 Tax Deduction, businesses have a fantastic opportunity to save money on taxes. Now, we know what you’re thinking:
- Who qualifies for this deduction?
- What does it cover?
- How much does it cover?
Well, your P2P gurus are here to help. Below is a brief rundown on this deduction, who’s eligible for it, and how you can make the most of it.
A Quick Disclaimer: This blog is written for informational purposes only. It should not be considered financial advice. Tax laws can be intricate and may vary based on your specific situation. Always seek professional guidance.
What is IRS Section 179 Tax Deduction?
Let’s start with the basics. The IRS Section 179 Tax Deduction is a provision that lets businesses deduct the total purchase price of certain business assets from their taxes. It’s like getting a discount on your taxes for buying things your business needs.
What Assets Qualify for a Section 179 Deduction?
The IRS Section 179 deduction only applies to assets you absolutely need to operate efficiently, like:
- Office furniture ex. desks, chairs, etc.
- Laptops and desktops, plus mission-critical software programs.
- Tools, machinery, and other equipment used in day-to-day operations.
- Printers, scanners, and copiers.
- Specific property improvements to your commercial office space.
- Shelving and storage units for your inventory.
- Cars, trucks, and vans that are used for business purposes. However, you cannot deduct the entire cost of a luxury car or SUV using Section 179.
If you’ve got further questions, we’d recommend checking the IRS guidelines for specific details.
How to Qualify for IRS Section 179 Tax Deduction
Wondering if you qualify? Here are the criteria you’ll need to meet:
- Your business should be structured as a sole proprietorship, partnership, LLC, or an S or C corporation. Individuals do not qualify.
- The equipment or property you’re deducting must be used more than 50% of the time for business purposes.
- This deduction applies to tangible property, such as machinery, office furniture, computers, and certain non-luxury vehicles.
- The property must be purchased and put into service during the tax year you’re claiming the deduction.
If you meet those criteria, congratulations! You’re eligible for a deduction. However, as of 2023, there is a deduction limit of $1,080,000 in place. While this limit is generous, there is a cap on the total amount of equipment you can purchase. Currently, this threshold is $2,700,000. If your equipment purchases exceed this threshold, the deduction begins to phase out.
Our advice? Keep an eye on the IRS website for any changes or updates regarding Section 179 tax deduction. Tax laws can evolve, and staying informed can help you make the most of this deduction year after year.
For example, the 2023 deduction limit increased to $1,160,000 and the total equipment purchase limit to $2,890,000 – both significant increases from 2022.
The Benefits of IRS Section 179 Tax Deduction
Now that we know what it is and if you’re eligible, let’s talk about why it’s so great for businesses, especially small ones.
- Immediate Tax Savings: When you use Section 179, you can lower your taxes right away. If you buy $50,000 worth of equipment, you can deduct the whole amount from your taxable income!
- Increased Cash Flow: Because you’re saving on taxes, you’ll have more cash on hand. That means more money you can use for other important things, like hiring new employees.
- Better Business Investment: The purpose of Section 179 is to encourage small-to-medium-sized businesses to invest in themselves. When you know you can save on taxes, you’re more likely to buy the things you need to grow.
Let’s say you run a call center, and you want to treat your entire team to new phones, which costs about $10,000. With Section 179, you can deduct the full $10,000 from your taxes.
Using IRS Section 179 Tax Deduction Effectively
Now that you know what Section 179 is, how to qualify, and how much it covers, here are some tips on how to use it wisely and well:
- Invest in Qualifying Assets. Ensure that your purchased equipment or software qualifies for the Section 179 deduction. While we did provide a brief list a few sections ago, it’s best to verify with a tax professional.
- Pay Attention to Deduction Limits. As you saw above, the IRS sets limits on how much you can deduct. Be aware of these limits, which can change yearly, and plan your purchases accordingly.
- Keep Accurate Records. Maintain detailed records of your equipment purchases, including invoices, receipts, and asset information. Proper documentation is crucial during tax season.
- Leverage Bonus Depreciation. You can sometimes combine the Section 179 deduction with bonus depreciation for even more substantial savings. Discuss this strategy with your tax advisor.
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