The end of the year is quickly arriving. Looking forward to 2020? Next year means new opportunities, new avenues of growth and, yes – taxes. Although tax season is still several months away, forward-thinking companies are planning now to take advantage of as many small business tax deductions as they can.
Tax deductions lower a company’s tax liability, potentially saving a business thousands of dollars. There are many routes to take them, but one of the most common lies in deductions for new office equipment. For companies that have been eyeing a new printer or document management suite, now is the time to make that purchase and put it into use before the year ends.
Small Business Tax Deductions 101: What They Are
A tax deduction is a deduction from a taxable income which reduces a person or company’s tax liability, or the amount of tax they pay. Since the IRS has specific rules about what qualifies as taxable income for businesses, many companies take advantage of these deductions to reduce their overall tax burden.
● Advertising fees
● Travel expenses, including the business use of a car
● Education expenses
● Legal and professional fees
● Moving expenses
● Rental expenses
● Telephone or internet expenses
● Office equipment and furniture purchases
According to the official IRS guidance on business tax deductions, business expenses must be ordinary and necessary. In other words, they need to be both commonly accepted within a trade or industry, and helpful or appropriate to a specific trade or business. Likewise, the IRS specifically prohibits deductions for personal, living, or family expenses from a business income unless an item or property is used partly for business purposes.
While there are many different deductions available to small businesses, there’s one which stands out from all the rest. That’s the Section 179 deduction, and it’s one of the most valuable tax deductions which small businesses can take advantage of to invest in themselves and reduce their tax liability.
Section 179 Explained
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of a qualifying piece of office equipment which was purchased and put into use during the tax year. It was a tax deduction designed specifically for small businesses to create a financial incentive for self-investment.
Since many common pieces of office equipment depreciate, Section 179 is particularly valuable. Rather than deducting a depreciating percent over a course of several years, Section 179 allows businesses to take the full purchase price as a deduction upfront, simplifying their taxes and creating an even lower tax liability. Under Section 179, businesses may:
● Deduct up to one million dollars of the cost of a piece of equipment. For most equipment, that’s the entire cost. For equipment costing over one million dollars, the deduction for that item is capped there.
● Count up to $2.5 million of equipment purchased. A company can spend up to $2.5 million before the bonus depreciation takes effect.
● Take a bonus depreciation of 100 percent. After $2.5 million, the deduction reduces on a dollar for dollar basis. It goes away after $3.5 million, making it a true small business tax incentive. This bonus deprecation is only offered in some years, and it exists for 2019.
The catch to taking a Section 179 deduction is that equipment purchases must be tangible property which is put into business use more than 50 percent of the time if it was purchased by an individual. Some examples of Section 179-qualifying purchases include:
● Off-the-shelf software
● Printers, scanners, or other office technology
● Business vehicles that exceed 6,000 pounds
● Office furniture
● Certain improvements to commercial buildings such as HVAC or fire suppression
How to Take a Section 179 Deduction for 2019
Taking a Section 179 deduction is easy. To do so, simply:
1. Purchase the qualifying property and put it to use during that tax year. For instance, printers purchased during 2019 and put into use before December 31 of this year would qualify for a Section 179 deduction.
2. Maintain records of purchase and the date it was put into use. These won’t be submitted with the IRS, but it’s always wise to have substantiation should they ask.
3. Check to see if a depreciation deduction is more valuable. In most cases, it won’t be but have a tax professional look into it just in case.
4. Complete form 4562. The IRS instructions for the form will include worksheets for finding the correct deduction amount.
Stay Ahead of the Tax Game with Doing Better Business
Small business tax deductions are an often-overlooked way for a company to save money. Section 179 encourages small businesses to invest in themselves by creating a tax write-off for new equipment purchases. With just a month left in 2019, companies that have been eyeing a new printer or software for the office should act now. Take advantage of Section 179 to grow and save.
Doing Better Business is thrilled to help companies invest in the tools they need to succeed. Contact us today to learn more.