As the end of the year approaches, now is the time to look at your expenditures in 2020 and consider how to maximize your deductions. One of the easiest and most beneficial deductions any size business can take advantage of is the Section 179 deduction.
The Section 179 Deduction is Relatively Easy to Qualify For
One reason this deduction is so useful is that the definition of “equipment” in the tax law is so broad. It includes everything from a cell phone to office furniture to costly medical equipment. The deduction can be applied to new or refurbished equipment and it does not matter if you financed the purchase. However, an important thing to remember about the Section 179 deduction is that you have to “opt-in”; they are not automatic.
Be Aware of Limitations
Section 179 deductions do have some limitations you should be aware of. There is an annual dollar limit to the amount you can deduct. In 2020, that limit is $1,040,000. It is also a “first year” deduction, meaning that it is a write-off for the year in which you make the purchase and put the equipment into business use. This is important to keep in mind if you are close to making a purchase decision but have not committed yet. The equipment must be installed and in use by end-of-day on December 31, 2020 to deduct the full purchase price.
There is also a spending cap to be aware of that will affect how much of $1,040,000 you will be able to deduct. In 2020, that cap is $2.59 million. Once you reach that amount, your deduction will decrease dollar-for-dollar.
Section 179 Is Only Part of the Story
The Section 179 deduction is only one of the deductions available to businesses to help decrease their tax burden. There are a few other options that you should discuss with your accountant and see if they make more sense for you. For example, there is a deduction known as the Bonus Depreciation Allowance that has no dollar limit, and through 2022, its 100% of the equipment cost. This deduction is also a “first year” deduction. It does apply automatically, but you can also elect not to use it as well for various business reasons.
Tools to Help You Decide
There are some online tools that are easy to use and can help you calculate how much you can save on your equipment purchases. The official website of Section 179 is a good place to start. You can find their calculator at www.section179.org.
You should always consult with a tax professional before deciding on the best course of action when making decisions on what tax deductions make sense for your business.
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