What is Section 179?
Section 179 is a tax deduction that allows a business to deduct the value of the purchase in the first year, rather than split over each year of use through depreciation. This provides an incentive for businesses to invest in machinery and equipment that they need in order to grow.
Although Section 179 has been around for many years, a lot of business owners are unaware of the exact details and how it can benefit their practice. The deduction amount has also increased over the past few years, so there are bigger benefits to be had.
Is Section 179 different than bonus depreciation?
Yes, Section 179 should not be confused with bonus depreciation, which serves a similar purpose. Section 179 deductions essentially reduce the cost of new purchases, whereas depreciation decreases the remaining cost over its useful life.
With depreciation, if a business purchased a machine for $50,000 it might write off $10,000 each year over five years. Section 179, on the other hand, allows all deductions to be made in the first year. This can help smaller practices invest in assets that help them grow and it can also help larger practices increase their capacity. Businesses can benefit from bonus depreciation for costs that exceed the limit under Section 179.
Claiming the section 179 tax deduction can be a sound financial step for your practice when deciding to purchase equipment, computers and other hardware. Investing in hardware and practice equipment sooner allows you to grow your client base and offer the best veterinary service to your patients.
Follow these steps for claiming the Section 179 deductions
Make the hardware/ equipment purchase
Purchase the qualified equipment that you intend to make the Section 179 deductions on. The Section 179 benefit requires technology and equipment to be purchased, installed and put into service in the same calendar year the value is to be deducted (i.e. between January 1, 2020 and December 31, 2020).
Goods that qualify under Section 179 include:
- Computers and office equipment
- Machinery and equipment purchased for business use (e.g. x-ray machine)
- ‘Off the shelf’ software
- Tangible property used in a business
There is a tax deduction limit of $1 million and a spending cap of $2.5 million. Section 179 does not apply to land, property outside of the US and intangible property (copyrights and patents).
Record, copy, and store purchase receipts
Safely store records of any property purchase, including the date of purchase, when the hardware/ equipment was put into service and the costs associated with the purchase (e.g. shipping and setup). These are required to elect the Section 179 tax deduction.
Complete IRS Form 4562 (Part 1)
You must elect this deduction; it is not automatic. Fill out this form to claim Section 179 tax deductions. Meet with your accountant or tax professional to discuss any questions and to help take full advantage of any deductions. Then include the form with your tax return with all calculated taxes for the year.
Is Section 179 different to bonus depreciation?
Yes, Section 179 should not be confused with bonus depreciation, which serves a similar purpose. Section 179 deductions essentially reduce the cost of new purchases, whereas depreciation decreases the remaining cost over its useful life.
With depreciation, if a business purchased a machine for $50,000 it might write off $10,000 each year over five years. Section 179, on the other hand, allows all deductions to be made in the first year. This can help smaller practices invest in assets that help them grow and it can also help larger practices increase their capacity. Businesses can benefit from bonus depreciation for costs that exceed the limit under Section 179.