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 the bank.
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 savings benefits.
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 taxable income.
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 the deduction.
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 the time.
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 spending cap.
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
- 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 other areas.
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