While it may not be everyone’s favorite time of year, tax season is fast approaching for both businesses and individuals. With that in mind, every SMB should ensure they’re taking advantage of every tax deduction and benefit available to them.
One of these tax deductions that SMBs may be eligible for is the Section 179 Tax Deduction, which allows SMBs to deduct select technology equipment or software purchased throughout the year for business purposes (or used more than 50 percent of the time for business).
The Section 179 tax provision, started in 2018, is designed to help SMBs offset the high costs they can incur for hardware, software, and equipment purchases and the long tail of depreciation that can be associated with them.
What can I deduct?
Equipment included in this deduction can include either hardware or software technology bought to enhance the business, including computers and “off-the-shelf” software. It can also include overall business needs, including equipment or manufacturing machines, certain business vehicles, furniture, alarms, HVAC, and roofing. It does not include leased property or property given as a gift. The complete list of qualifying items and requirements can be found at www.IRS.gov or consult with a qualified tax professional.
Why should I leverage this now?
The deduction is beneficial in a time of technology hardware shortages, which are only anticipated to increase in the years to come. With the help of this deduction, it could make sense for an SMB to consider purchasing hardware sooner rather than later to anticipate this rising trend against their future business needs.
This sentiment is furthered because Section 179 only has a temporary shelf life of benefit for businesses. The Tax Cuts and Jobs Act, which introduced Section 179, has a planned phase-out for the benefit through the end of 2026, with the annual percentage able to be claimed for tax deductions decreasing every year after 2022 until that date.
Limits to deductions
There is a limit to how much a business can deduct. Businesses can deduct up to $1 million annually under Section 179, and they also can only deduct up to the total taxable business income for the year. Finally, businesses can also only deduct the percentage of the hardware, software, or equipment cost used for business, for example, deducting 60 percent of the total cost if used 60 percent of the time for business purposes versus personal use.
Consult your tax professional
Section 179 is not included in standard tax preparation processes in many cases, and instead, it is included as Part 1 of the IRS form 4562 (attached to a tax return). With that in mind, every SMB should make sure to ask a qualified accountant, tax professional, or finance team if they are eligible for these types of discounts and if they make sense for their overall accounting strategy before the April 2022 deadline.