Part of owning a business is being as thorough as possible when finding opportunities to maximize profit. Boosting the bottom line is the ultimate goal of almost every business venture, and while focusing on operational excellence in order to maximize revenue is important, one must also examine his or her expenses to see where they can be reduced.
One of the biggest expenses is, thankfully, also one of the biggest areas for reduction: taxes. Taxes can often eat up close to half your profit as a business, so any method for reducing that blow needs to be utilized. One method for tax reduction that is often overlooked is called Section 179. Section 179 is a portion of the United States Internal Revenue Code that allows business owners, within certain restrictions, to expense the cost of new business equipment as a tax deduction.
Buying business equipment and effectively employing a Section 179 deduction can reduce your taxable income, giving you a tax shield that may mean the difference between a good year and a bad year.
Plan Now for Year-End Tax Savings
Section 179 has been around longer than most businesses (since 1958). But when you’re planning for tax write-offs, it’s important to consider any recent changes. For example, in 2017, the provision saw a massive increase the deduction limit – from $500,000 to $1,000,000 – under the Tax Cuts and Jobs Act. Here are some tips to keep in mind as you plan your Section 179 deduction.
Consider the Phase-Out Limit
The phase-out limit for Section 179 deductions is $2.5 million. That means that as a business’s income approaches $2.5 million, the benefit it sees on a dollar-by-dollar basis in its deduction may decrease. The smaller the business, then, the bigger the benefit from Section 179. Purchasing or financing equipment sooner rather than later kin your business’s life is a good strategy to maximize your tax shield.
Finance to Hit the Max
Equipment lending is the best way for a small, lower-income business to get maximized benefits from Section 179. When you get a loan on new business equipment, your Section 179 deduction is calculated from the total loan amount, not your prorated payments thus far. If your business doesn’t have the free cash to purchase outright, getting a loan is a good way to reach that $1,000,000 maximum to save as much as possible on taxes.
The Company Must Be the Owner
This is a common mistake among small business owners: Their business needs new equipment, so they go to the supplier and purchase it (either outright or using a loan) in their own name, rather than the company name. Unfortunately, for a Section 179 deduction to be an option, the equipment must be listed under the business’s name, not the owner’s name. This remains true even if the business and the owner share the same name, as the company is still technically its own legal entity.
Consider Your Spouse
If you’re a married business owner, note that for this benefit, the IRS treats you as one tax entity. Even if you file separately, you still share only the same limits for Section 179 equipment write offs. When filing separately, the default allocation between couples is 50% each unless they elect to use another percentage value. Whatever the number, the total allocation must equal the full 100%.
Section 179 for Truck Purchases and Fleet Sales
One of the most common uses of Section 179 is to write off the cost of purchasing a business vehicle. Unfortunately, over the years, many business owners abused equipment write-offs to buy expensive vehicles for their own personal use. Because of this, the government tightened restrictions on what gets classed as a work vehicle.
For business owners that use trucks and other vehicles in their fleet, meeting these requirements is fairly easy. While the rules governing qualifying vehicles are sometimes complex, here are the most common ones that may apply to companies that rely on work vehicles:
- Passenger vehicles with room for nine people or more in addition to the driver
- Forklifts and other construction-type vehicles
- Classic cargo vans
- Tractor trailers
The vehicles can either be new or pre-owned, but they must have been acquired by the business in the last year. In addition, they need to be used for business at least 50% of the time.
Section 179 for Machines and Equipment
Section 179 allows for deductions based on the purchase of new business machinery as well. Examples of business machinery include anything that is used either directly or indirectly for the benefit of the business. New conveyor belts, computers, or an updated HVAC system can all be expensed. The qualifications are pretty straightforward: The equipment needs to be used for the business, and it needs to be ready for use (but not necessarily in use). This may mean installing the machine or having it serviced.
Act Now for 2019 Tax Savings
Different types of businesses need different lengths of time to get their equipment and outfit it for use before the fiscal year ends. The best practice is to acquire new equipment as soon as possible to allow yourself plenty of time to get that tax shield. There’s still plenty of time this year for most businesses to take that step and maximize their savings.
Here at Aztec Financial, we specialize in equipment lending to help businesses get the machinery they need to grow. For more information about Section 179 deductions and about equipment lending in general, check out our full guide or call us at 800-644-9537 with any questions you have or services you need.
Disclaimer: Aztec Financial does not provide tax advice and is not certified to provide tax information. Please contact your CPA for any questions and if you qualify for section 179. Thank you.