Understanding the ins and outs of making smart business financial decisions can be a daunting task. We spoke to Larry Moller, President of Anthem Capital Group, and got his insight on the Section 179 Tax Deduction and how it can be applied to the purchase of a new CNC Router.
I have encountered a lot of questions from customers about the IRS’s Section 179 Deduction. I hope this sheds some light on this powerful tax benefit. In addition, included below is a brief explanation of the Bonus Depreciation tax benefit also available to businesses in 2016. For specifics and the applicability to your business, I would encourage you to ask your accountant.
What is a Section 179 Deduction?
Section 179 is a tax benefit provided through the IRS tax code to help small businesses. Section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the current tax year. That means that if you purchase or finance qualifying machinery, you can deduct the ENTIRE PURCHASE PRICE from your business’s gross income up to certain limits. The IRS allows a business to expense via a Section 179 deduction up to $500,000 of equipment purchased during the current tax year provided the total amount of equipment purchased during the current tax year does not exceed $2,000,000. For every dollar of equipment purchased during the current tax year over $2 million, the Section 179 Deduction decreases dollar-for-dollar.
How does Section 179 work?
When a company buys equipment, whether by a cash purchase or by financing it, the company typically spreads the expense over several years through depreciation. For example, if a company buys a machine for $100,000, the company can expense about $20,000 per year through deprecation for 5 years. Section 179 allows that company to expense the entire $100,000 (up to the $500,000 limit mentioned above) during the current tax year if there is sufficient income to offset the expense, thereby accelerating the tax savings.
Does your business qualify for the Section 179 Deduction?
Companies that purchase or finance up to $2,000,000 in new or used business equipment during tax year 2016 should qualify for the Section 179 Deduction up to $500,000 provided the equipment is:
- installed and placed in service during the same tax year
- More than 50% of the use of the equipment is for the business
“Off-the-shelf” software, particularly if it is acquired with the equipment, may qualify for the Section 179 Deduction (restrictions apply).
What is Bonus Depreciation and how does it differ from a Section 179 Deduction?
Bonus depreciation in 2016 is being offered at 50% of the cost basis (after any Section 179 Deduction is taken if applicable). When applying a Section 179 Deduction and Bonus Depreciation, please note that the Bonus Depreciation benefit applies to new equipment only, while the Section 179 benefit applies to the acquisition of both new and used equipment.
Bonus Depreciation is useful to companies that spend more than the current $2,000,000 cap on new equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
To determine if and how Section 179 and/or Bonus Depreciation may benefit your business, please contact your accountant.
Sample Section 179 Analysis
Equipment Purchase Price: $150,000.00
Section 179 Deduction: $150,000.00
Cash Savings: $ 52,500.00
($150,000 deduction x 35% tax rate)
Equipment Cost after tax: $ 97,500.00