If you’re planning to acquire expensive business equipment this year, it’s important that you know how this will affect your income taxes.
It hurts to spend a lot of money on equipment for your business. You know you need to do so from time to time, and you know that smart purchases will help you make money in the long run, but it can still be hard to part with hundreds or thousands of dollars.
This is why Section 179 was added to the IRS tax code. The purchase price of business equipment that falls within Section 179 guidelines can be deducted in full for the tax year it was acquired. Eligible items include:
- Manufacturing equipment,
- Business vehicles that weigh more than 6,000 pounds,
- Computer hardware and software, and,
- Office equipment and furniture.
The IRS will expect thorough documentation of the business equipment eligible for a Section 179 deduction. This is a complicated form, and it must be completed with absolutely accuracy. We can help you with this issue.
What is the dollar limit for a Section 179 deduction?
The Section 179 cap has varied through the years because of various government stimulus acts. The $500,000 maximum was made permanent late in 2015 through the PATH Act. This limit makes Section 179 a true small business deduction.
Can you take the Section 179 deduction if you’re leasing or financing equipment?
Yes. In fact, the deduction may actually be profit for your business because you will be deducting the full amount of the equipment on one year’s tax return, even though you may not be paying off the lease or financing amounts in their entirety during that same year that the Section 179 is claimed. Some companies use this strategy because of its ability to improve cash flow and profits.
There are many, including land — and land improvements (like swimming pools and paved parking areas), the cost of property that you lease to a third party, and property used for the purpose of lodging. Even if your acquisition falls under the broad “eligible property” description, you may not be able to take the deduction. The IRS has built many, many exceptions to these broad categories into the tax code.
What about business equipment that costs more than $500,000 or that doesn’t meet the Section 179 requirements?
In these cases, you have to deal with the dreaded “D” word: depreciation. This is an annual income tax deduction that helps you recapture the cost of certain types of property over multiple years. Basically, the IRS is giving you a break to compensate for:
- Wear and tear,
- Deterioration, or,
To complicate matters more, there is more than one type of depreciation.
We don’t recommend that you attempt to attempt these complex calculations yourself. If you are making a major acquisition of business property in 2016, let us help. We can determine whether you’re eligible to take a Section 179 deduction or if you’ll need to depreciate the asset.
Stock image courtesy of FreeDigitalPhotos.net