Tax time is usually dreaded by small business owners every year. However, with a bit of proactive planning, you can take advantage of a benefit that is only available before the end of the year. If you plan to upgrade any of your business equipment, software, or vehicles but are waiting for extra incentives, you should consider the benefits provided by Section 179 Bonus Deductions for 2021.
Section 179 is part of the United States Internal Revenue Service (IRS) tax code that allows a business to write off some or all the purchase or lease price of business-related equipment and software put into service within the tax year. The IRS reviews and modifies the rules on Section 179 Deductions annually. For 2021 the IRS is allowing “Bonus Deduction.”
Standard Section 179 Deduction rules allow a company to deduct equipment costs following a depreciation schedule. For example, if a company buys new computers and puts them into service the same year, they will likely put those new assets on a 5-year depreciation schedule. If the computers in our example have an actual cost of $10,000, the annual deduction allowed is $2,000, assuming they are used for business purposes 100-percent of the time.
Section 179 Bonus Deduction rules allow a business to deduct the entire purchase price from its gross income in a single year. This tax incentive makes it easier for small businesses to invest in equipment and software upgrades made necessary by the rapidly evolving requirements of today’s business climate. However, as you might expect, there are some limitations and conditions to consider.
The IRS designed the rules and limits of Section 179 Bonus Deduction primarily to help small businesses in the United States. However, due to recent events, United States lawmakers have passed Congressional Tax Bills and Stimulus Acts to encourage small businesses to take advantage of Bonus Deductions. Two major requirements for claiming Section 179 Bonus Deduction are service year implementation and business use percentage.
Service year implementation requires that equipment or software be purchased or leased and put into service within the 2021 tax year to be eligible for the Section 179 Bonus Deduction for 2021.
Percentage of business use allows business owners to use business assets for personal use. For example, a business vehicle purchased for $50,000 in 2021 and driven a total of 30,000 miles by December 31, 2021, would qualify for the entire $50,000 Bonus Deduction from the business’ gross income if the vehicle was only driven for business use. However, if half of those 30,000 miles were for personal use, the Section 179 Bonus Deduction for the vehicle would be 50-percent of the $50,000 purchase price, $25,000.
Although Section 179 Bonus Deduction allows for a 100-percent deduction of most business-related equipment purchases, there are some limits. Tax rules for 2021 allow Section 179 Bonus Deduction of the entire purchase or lease price for equipment used exclusively for the business up to $1,050,000 with an additional 100-percent Bonus First-Year Depreciation of $100,000 as provided by the Tax Cuts and Jobs Act of 2021.
Taking advantage of Section 179 Bonus Deductions allows businesses to update their IT environment while saving money. For example, assuming a company has a 35-percent tax rate, and purchases new IT hardware and off-the-shelf software dedicated to business use totaling $1,150,000, the cash savings total $402,500 after taxes. Taking the Section 179 Bonus Deduction, in this case, results in an actual after-tax equipment cost of $747,500 instead of $1,150,000.
There is a cap to the total eligible amount for the Section 179 Deduction. The limit for the total amount of equipment purchased is $2,620.000, according to Section179.org. After that milestone, the Section 179 Deduction phases out on a dollar-for-dollar scale, going away entirely after spending $3,670,000.
Any new or used business-related equipment purchased, financed, or leased and put into service within the 2021 tax year should qualify for the Section 179 Deduction provided the total cost is below the $3,670,000 cap. Most business-related equipment, vehicles, and off-the-shelf software will be eligible as long as the purchase is put into service between January 1, 2021, and December 31, 2021.
Of course, the business use percentage affects the eligible amount for the deduction. Internal Revenue Service rules require any vehicle, equipment, or software must have at least 50-percent business use. Therefore, it is essential to document the percentage of business usage for tax or audit purposes throughout the year.
Time is one critical factor when considering upgrading your IT environment. Unfortunately, the current limitations affecting worldwide supply-chains make any quick turnaround projects difficult. In addition, rules for Section 179 Deductions require equipment to be put into service before December 31, 2021. While these rules are always subject to change and recent legislation proves favorable to small businesses across the country, there is no guarantee that the deadline will be extended.
As a business owner, you know the value of leveraging professionals to gain value. So, just as you should seek advice from your tax adviser, we welcome you to contact us to discuss any of your IT needs. At Techsperts Business Technology Solutions, we are your New Jersey and New York IT support company providing the following services.
Special thanks to my friend Holden Watne at Los Angeles IT services company, GenIX for his insights into Section 179.
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