Managing a business is a lot like managing your weight – if you take in more than you put out, you’ll have major gains at the end of the year. And with both business and personal weight, those gains can have negative consequences. Let’s learn about how Tax Section 179 can help your business.
It’s the goal of every business owner to make as much profit as possible. However, remember that that profit comes with a nasty little caveat: taxes. The more profit you generate, the higher the tax. Thankfully, this year Uncle Sam will show some mercy come tax time in the form of Section 179 deductions. As a disclaimer, we are not tax advisors, and any planning or decisions should be reviewed or undertaken by your company’s CFO or accounting professionals. Look at this as a guide to help motivate you to take advantage of this law.
Deductions under Section 179: What Are They?
When we talk about Tax 179 deductions, they are essentially write-offs with an added benefit. With many write-offs, you can only take partial deductions over a few years. For instance, you buy a car for business but you can only write off a portion of the car’s value for the next five years. By definition, Section 179 in the tax code allows a business to deduct the value of a property purchased for the business against any profits (or losses) incurred during the year in which the property was purchased, thus lowering the total tax burden. This “property” falls into the following categories:
Business Personal Property: This would include anything purchased for business use, not bolted to a floor or wall. This section includes furniture, computers, software — even paper and pens!
Machinery and Equipment: This category includes items purchased for businesses that cannot be moved, or equipment permanently bolted in place. An example of this would be a printing press or conveyer belt.
Business Vehicles: These are cars or trucks with a gross weight of more than 6,000 lbs and are used exclusively for business purposes.
Listed Property: This is property used for business purposes. In this case, you don’t have to use it entirely for business purposes, but you can only deduct the portion used for business proportionate to the time used. For instance: if you have a home office and work for eight hours a day for five out of seven days a week, that means you use your home for business purposes about 23.7% percent of the time. Therefore you can write off 23.7% of your mortgage.
Capital Improvements: You can deduct the costs of improvements you make to a building used for business. This area also includes items like air conditioning or alarm systems.
Why is this Important for Small Businesses?
It would not be an over-exaggeration to state that many small businesses wouldn’t exist without these deductions. Section 179 deductions may mean more profits for large corporations, but they may be the entire profit margin for small companies. One reason for this is that capital expenditures make up a large proportion of the total costs of smaller businesses compared to larger companies. Having the ability to take these write-offs in a single year can make all the difference in the world.
Furthermore, having the ability to purchase equipment and property on such favorable terms will allow small businesses to purchase more than they planned, enabling them to grow more rapidly. On the other hand, if a company doesn’t need more equipment or other purchases at that time, they could invest the tax savings in different ways, such as hiring more employees, which can also contribute to business growth. As of 2018, limits have grown from $1 million per qualified capital purchase to $2.5 million. This large amount is more than enough for most small businesses!
Make Deductions Part Of Your Budget
Some view tax deductions as a bonus, but that shouldn’t be the case. When creating a budget, deductions should be included as a part of your income, or as a way to justify increased expenditures. Small companies, especially when new or in a growth phase, need all the liquidity they can get.
As we are nearing the end of 2021, are you finding your company has extra funds sitting around? By taking advantage of Section 179 deductions, perhaps you now realize that you will have more to write off this year than initially thought, and you’ll have a lower tax burden than you’d planned on. Therefore, you may want to consider investing in yourself for next year. It’s not easy planning your budget for new businesses since income forecasts aren’t as predictable as they are for established businesses. While the economy is strong at the moment, we all know that this can change at the drop of a hat. If things are going well this year, it would be smart to capitalize on that by getting ahead of some of next year’s purchases.
That extra ten pounds you’ve gained this year may not be doing you any favors, but the gains your company made will not only put more money in your pocket, it can also help you invest in the future. If you have any questions, consult with your tax professional to see which Section 179 deductions can be a boon to your bottom line. We have been doing this for awhile, and could provide some guidance as well, contact us.