Section 179, Software Purchases, and YouBy My Service Depot on Monday, December 30, 2019
IRS Section 179 could net you some big tax savings on software purchases made before the end of the year.
The end of the year means many things. Before the clock strikes twelve on New Year’s Eve, most people have a long list of things to do. They take down the decorations, they shop end-of-year sales, and they plan for the new year. For the average person, this might mean setting New Year’s resolutions, but when you own a business, you have to think bigger. Before the start of the new year, you need to plan your business purchases–and tax deductions are a big part of that.
Even though it might not always feel like it, the federal government knows you need to spend money to make money, so it offers a variety of tax deductions for businesses. Section 179 is part of that.
What is Section 179?
According to the official Section 179 website, “Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income.” The government put this program in place to encourage companies to reinvest their earnings towards sustaining the success they have achieved, evolving with the times, and pursuing growth.
Let’s put this in perspective. Say you own a plumbing business, and you want to buy some new mobile software apps for your team. You can deduct the entire amount of that purchase instead of depreciating the value of those items over time.
Understanding Section 179
Section 179 has been around for a while. It was affectionately known as the “Hummer Code” or the “SUV Tax Loop” for a time because so many business owners wrote off the purchase of SUVs, but Section 179 is more than a punchline–a lot more, especially now. This piece of the tax code could be your new best friend.
As wonderful as the Hummer Code sounds, the items and expenses allowed under Section 179 were somewhat limited. For instance, the maximum amount that could be deducted in 2005 was just $105,000. Furthermore, business owners could only deduct certain things, like machinery, some fixtures, and so on. Then, the Tax Cuts and Jobs Act of 2017 changed that
Beginning in 2018, new tax cuts allowed businesses to deduct as much as $2.5 million of qualified purchases each calendar year (up to $1 million per purchase). The types of investments included also expanded.
Qualified Purchases Under Section 179
Section 179 lets business owners write-off tons of things they would previously have had to deduct over several years–including most of the items businesses buy all the time–but there are restrictions. You can improve property as long as you don’t make the building bigger, add an elevator, or mess with the structure of the building. You also can’t use the deduction to install a roof, alarm system, or HVAC. Otherwise, as long as you don’t acquire the property from someone in your family and you meet a few other qualifications, you are golden.
How does it apply to software?
Section 179 absolutely applies to software. There are specific restrictions here, too, though. The software must be used to help you make money, and it has to be available to the public. In other words, you can’t get custom software (and forget about buying language learning software unless you are using it to expand your business). Virtually everything else is free game, from QuickBooks to Smart Service.
Why Businesses Might Want to Make Purchases Now
The 100% deduction that Section 179 allows will not last forever. If you want to take advantage of the tax deduction, you need to act soon. Mark your calendar: Section 179 expires on January 1, 2023.
While that date is a few years away, time moves quickly. Ideally, you should use the next couple of years to fortify your business with strategic purchases. Start with solving your pain points and work from there. You only have a limited time to take advantage of the program. Software represents an excellent place to start. There is no time like now to move away from inefficient spreadsheet tracking and paper filing to treat your business to a streamlined system that eliminates duplicate efforts.
Getting in on the Action
IRS Section 179 entitles businesses to a significant tax deduction on software purchases. Whether you want to upgrade your billing program, add scheduling software, or find a better way to manage your service contracts, the time is now. With the end of the year approaching, move to buy software before the year-end deadline and take advantage of the Section 179 deduction.