In the past 3 months, we have had a number of prospects and customers approach us about updating their systems, some examples are:
- Updating servers and storage that are more than 5 years old
- Implementing Wi-Fi for a 125,000 sq.ft. warehouse (plus a network upgrade and redesign)
- Upgrading the network firewalls, switches, and Wi-Fi to support new, and expanded, applications in both the cloud and production facilities
- Replacing 100+ workstations to start a lifecycle refresh program (and windows O/S)
- Overall lifecycle upgrade to support newly acquired division, and increasing performance on all
These may seem like daunting tasks, but just so you understand, they need not break the bank. You need to buy new equipment to help the business grow, or perhaps to update your end of life technology, or both. So how can you get the best “bang for your buck” – especially if you’ve had a pretty good year?
Today, Section 179 is one of the few government incentives available to small businesses, has been included in many of the recent Stimulus Acts and Congressional Tax Bills, and is more beneficial to small businesses now more than ever.
The Tax Cuts and Jobs Act (TCJA) allows taxpayers to write off certain tangible property costs for the tax year, up to $1 million and increases the phase-out threshold to $2.5 million.
Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was to provide much needed tax relief for small businesses. Millions of small businesses are actually taking action and reaping real benefits.
Section 179 Explanation:
In years past, when your business bought qualifying equipment, it typically wrote it off a little at a time through depreciation. For example, let’s say your company spends $50,000 on a machine, and applying a standard depreciation model, you would write off (say) $10,000 a year for five years. These are just round figures for illustration purposes.
Now, while it’s true that this is better than no write-off at all, most business owners would probably prefer to write off the cost of the entire equipment purchase for the year in which it was acquired. And that’s exactly what Section 179 does – it allows your business to write off the entire purchase price of qualifying equipment for the current tax year. This has made a huge difference for many companies (and the economy in general) by allowing businesses to purchase much needed equipment right now, under Section 179, instead of waiting. For most small businesses, the entire cost of qualifying equipment may be written-off on the 2019 tax return
(up to $1,000,000).
Does My Business Qualify For A Section 179 Deduction?
All businesses that purchase, finance, and/ or lease new or used business equipment during the 2019 tax year should be able to qualify for the Section 179 Deduction ( assuming they spend less than $3,500,000 ).
Also eligible are most tangible goods used by American businesses, including “off-the-shelf” software and computer equipment ( servers, switches, storage, workstations, etc. ).
In order to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2019 and December 31, 2019.
What Other Tax Saving Options Do I Have?
Bonus depreciation is offered some years, and not offered in other years. In 2019, it’s being offered at 100%.
The most important difference is that both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is “new to you”), while until recently, Bonus Depreciation has only covered new equipment. In a switch from recent years, the Bonus Depreciation now includes used equipment as well. The difference here is that Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,500,000 ) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment, and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
So How Do I Benefit From The New Changes In The Tax Law?
Let’s say you are opening a new facility, and as a result need new office equipment before year end. Additionally, you have scheduled an upgrade to your technology systems, to support your growth and to keep current, as your current technology is over 4 years old.
This new facility and existing plant equipment (machines, racks, packing equipment, forklifts, furniture, phones, etc.) run approximately $950,000, and your technology refresh is $200,000 ( 3 new servers, a SAN, switches, 60 workstations, Microsoft licensing, etc. ) for a total of $1,150,000.
You’ve forecasted a net income of $2mm on your $40mm in revenue for the 2019 year. If we use the Section 179 example chart, you’ll see this scenario results in a potential tax savings of $241,500 for the 2019 tax year applying the applicable Section 179 and Bonus Depreciation tax code features.
If your forecast is to implement technology equipment in the next 6 months, you may consider advancing the purchase to take advantage of 2019 tax savings. Call David at 614.495.9658 to ask about how you can use these government regulations to your advantage.