Upgrade Your IT Infrastructure with Section 179 Tax Deductions
Upgrading your organization’s IT equipment and software will save you money, keep your data safe and increase productivity among your staff, but upgrading your technology is often a significant expense. One way to save on new equipment is to use the tax advantage of the Section 179 deduction. This tax advantage allows businesses to receive significant savings at tax time by deducting qualifying business equipment and software.
Section 179 tax deduction is designed to help businesses alleviate some of the financial burden of acquiring a lot of equipment or software and incentivize them to act quickly at the end of a tax year. While there are some limitations on amounts and types of equipment, the allowances are significant enough for many small and medium-sized companies to see substantial savings.
What’s Section 179?
Section 179 is a tax deduction from the IRS tax code that allows you to deduct the full purchase price of qualifying equipment and off-the-shelf software, either purchased or financed during the tax year. This tax deduction is an economic incentive offered by the U.S. government to encourage businesses to invest in their businesses.
In the past, you’d purchase equipment and then write off the expense through depreciation over the years. However, Section 179 allows you to write off the entire equipment purchase for the year you buy it. That means, if you buy, lease, or finance a piece of qualifying equipment, you can deduct the full purchase price from your annual gross income. For example, if a business bought $60,000 worth of equipment in 2021, they can deduct the entire $60,000 from their 2021 taxable income. If you finance, you can deduct the entire purchase price even if you don’t pay the entire purchase amount in 2021.
What Qualifies for Section 179 Deduction?
To qualify for a Section 179 deduction, your asset must be:
- Tangible: Physical property such as office equipment, computer software, and computer hardware qualifies for Section 179, while intangible assets like patents or copyrights do not.
- Used more than 50% in your business: An asset that is primarily for personal use but occasionally used for business isn’t eligible. If the business property isn’t used for conducting business 100% of the time, you can only take the business deduction for the percent (more than 50% required) that it is used for business. For example, if you purchase new business equipment and only use it 80% of the time for business, you can only deduct 80% of the total equipment cost.
- Not acquired from a related party: This includes siblings, spouses, parents, grandparents, descendants and businesses, trusts, and charitable organizations with which you have a relationship.
- Equipment must be placed into service no later than December 31 of the tax year for which the deduction is being claimed: Section 179 rules require you to start using the asset in your business to take the deduction. For example, if you purchase a piece of equipment in December of 2021 but don’t start using it until 2022, you would have to wait until 2022 to claim the Section 179 deduction for that asset.
Technology products that qualify for Section 179 tax deduction include:
- New equipment: Workstations, servers, on-site backup devices, hard drives, phone system hardware, etc.
- Used equipment: Any of the equipment above that has been refurbished or resold
- Off-the-shelf software: Software that’s available to the public that hasn’t been custom engineered. The deduction also applies to various solutions, such as software as a service (SaaS), enterprise resource planning (ERP), and customer relationship management (CRM). Solutions tailored to specific functions, such as human resources, healthcare, legal, and accounting, may also qualify for the deduction. The software must have a “determinable useful life” so it qualifies as depreciable, must be used for an income-producing activity, and the life of their purchase should extend beyond one year.
What are Section 179 Limits?
Setting the limit in advance allows business owners to calculate their expenses more systematically. Previously, the annual limit under Section 179 was often set after the tax year had started, such that it applied retroactively. This meant that business owners did not know how much money they could spend on qualifying equipment while remaining within the range of the deduction.
The following Section 179 limits apply for the 2021 tax year:
- The maximum amount that can be deducted is $1,050,000
- The maximum amount of equipment that you can purchase and take the full deduction is $2,620,000. If total equipment purchases exceed $2,620,000, the Section 179 deduction decreases dollar for dollar, reaching zero once $3,670,000 of equipment is purchased or financed. This means larger businesses that spend more than $3,670,000 on equipment are not eligible for the Section 179 deduction.
- 100% bonus depreciation: Bonus depreciation is generally taken after the Section 179 Spending Cap is reached. The bonus depreciation is available for both new and used equipment.
Your Section 179 deduction is also limited to your company’s net income for the year — you can’t deduct more money than you made. For example, if you have a net income of $50,000 before taking the Section 179 deduction into account and purchased $60,000 worth of eligible equipment and software, your deduction is limited to $50,000. At that point, you can opt to take regular depreciation on the remaining assets. However, you can carry that $10,000 deduction forward to next year, as long as your net income allows it.
Equipment covered by the Section 179 deduction might also qualify for bonus depreciation, further reducing your tax bill. Bonus depreciation, also known as first-year bonus depreciation, is a tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets rather than write them off over the “useful life” of that asset.
Unlike Section 179, bonus depreciation isn’t subject to any annual limit, and the property doesn’t need to be used in the business at least 50% of the time. Instead, bonus depreciation tax rules require the business owner to place the property in service in the year they seek a deduction for it. The bonus depreciation amount is currently set at 100% for any long-term business asset placed in service after September 27, 2017, and before January 1, 2023. This means you can deduct 100% of the cost of that item in the first year after you purchase it. However, you must apply Section 179 first to take advantage of the bonus depreciation tax incentive. After the Section 179 limit of $1,050,000 has been reached, the rest is taken as bonus depreciation.
For many companies, the end of the year is a time to regroup, refresh and reorganize to start the New Year right. Why not roll out new technology and reap the benefits of upgrading your business technology while making significant cost savings in your tax deductions? Section 179 is the best way to increase your organization’s bottom line while improving its IT infrastructure.
ECW Network & IT Solutions can help you determine the right technology solutions to help your business take full advantage of the Section 179 deduction and everything it has to offer before the end of the year. Contact us today to schedule a consultation!
ECW Computers is an information technology company. Headquartered in Deerfield Beach, FL, we specialize in providing unique, specially-tailored Managed IT solutions to businesses in Fort Lauderdale, West Palm Beach, Miami and across South Florida.