I know, I know: Tax articles are boring. But not this one. Why?
Because I'm going to share with you a big tax deduction you can take for your business that could save you thousands of dollars. Every year. And the best thing about it? You don't even need to spend money to take the deduction...at least for a while.
It's called the Section 179 deduction and it's about depreciation. Don't fall asleep on me yet because you do need to know some details.
Most businesses—particularly small businesses—qualify for this deduction. And the deduction is not small. If you do qualify, you can deduct up to $1,040,000 in 2020 for an individual capital purchase or $2,590,000 in total for all your capital purchases. After that amount the benefits begin to phase out until you've purchased a total of $3,630,000. But yes, you're reading this right: It's all deductible, within those limits. You don't have to put it on your balance sheet and depreciate it over a period of years. You can write off the full expense in the first year.
Just think about that. You can purchase office furniture, a forklift, a printing press, a piece of testing equipment for your shop, or a big truck. You can even purchase technology like computers, servers, switches, access points, monitors, and devices, as well as all the software you need for your business. Regarding software, it needs to be "off-the-shelf" and not custom-written or heavily modified.
When you make these purchases, you can just write them off as an expense against your income immediately and in that year. The items can be new. Or they can be used. It doesn't matter. You can't take a deduction in excess of your taxable income that year. However, you can carry over for an unlimited number of years because of the business income limitation.
But here's the greatest thing: Like I mentioned above, you don't have to spend any money to take advantage of this deduction...yet.
I say yet because ultimately you're going to have to spend. But the rules for taking a deduction in the first year is that you put the item "into service"—in other words it’s operational and ready for use in your business.
The IRS doesn't care if you paid for it, as long as it's operational and being used. Which means that you can finance your purchase and still take the deduction even though the item was bought with borrowed funds. So there's no cash out of your pocket. However, you still get the deduction. And with interest rates being as low as they are, it's a great time to get financing.
Suppose you don't qualify for a traditional bank loan? Don't worry, there are plenty of other places to try. I always point my clients to the Small Business Administration. Its Section 7(a) loans allow qualified small business to borrow funds from member banks that can be used to purchase technology and equipment (as well as property, inventory and even working capital) and, because the SBA is backing the loan, banks can extend the financing to companies that otherwise wouldn't be qualified. Again, the IRS doesn't care.
Now that you understand what Section 179 is I have even better news: You may not need to understand it all. That's because, thanks to the 2017 tax reform act, businesses are allowed to deduct 100% of their first-year purchases—the same as above and with most of the same rules of Section 179 anyway. It's called "bonus depreciation" and it starts phasing out in 2023. So why choose Section 179 instead of "bonus depreciation"? It could be because your state has limits on bonus depreciation or you have property that you want to deduct that doesn't qualify for Section 179.
So to recap: You buy technology like software or a piece of equipment. You get a lender to finance it while interest rates are low. You put it into service by the end of the year. Then—whether you elect Section 179 or bonus depreciation—you write the entire thing off. You save significant money on your taxes.
So, considering that your tax bill—if you're like most small and medium sized companies—is probably one of your biggest expenses is this not the most exciting article on taxes you're ever read? Of course it is. Oh, and of course talk to your accountant. But make your plans now. The year is coming to an end sooner than you think.
