IRS deductions for Section 179 eligible property are one of the ways the government encourages small and medium businesses to reinvest in themselves through technology.
This section of the IRS code allows businesses to deduct the total cost of qualified depreciable assets purchased in a single year (up to a limit) from their tax returns. This means instead of using depreciating allowances over several years, companies can invest in new equipment and technology regularly.
In other words, companies can see the tax benefits from major purchases and investments in technology in a condensed time period, allowing them to take that surplus budget and reinvest it into their infrastructure, promoting continual growth and, in turn, economic stimulation.
If you need ideas on how and where to implement technology into your organization, watch Impact’s webinar, How to Identify High-Value Opportunities for Innovation.
How Does IRS Section 179 Work?
For companies that want to make use of the deduction, they’ll need to follow the process described below:
- The company purchases Section 179 eligible property this year and puts the equipment into service between January 1st, 2023, and December 31st, 2023. It’s important to keep records of the purchases, including the freight, setup, installation costs, and other associated expenses.
- After forwarding the records to the company’s tax professional, they’ll add up all the costs and determine the total deduction amount.
- Using IRS Form 4562, the company elects to use the Section 179 deduction and includes the allowance in its tax filing for this year.
- The company’s tax professional calculates their taxes for 2023 and deducts the allowance from their annual tax burden.
Annual Limits of IRS Section 179
The limits change from one year to the next, with 2023 seeing a slight increase over the 2022 limit which was an increase from 2021 marking a 2-year trend.
For 2023, this limit was raised to $1,160,000. It applies to financing, purchasing, and leasing qualifying equipment and software, helping companies acquire new technologies and recuperate the costs in the same year.
After a company spends $2,8900,000 in 2023, the deduction phases out on a dollar-for-dollar basis and optimizes the section 179 benefit.
Bonus Depreciation with IRS Section 168(k)
Bonus depreciation falls under Section 168(k) of the code, and while in 2022 it was offered at 100%, this is being phased out over the next several years. The bonus depreciation was an economic tool designed to stimulate business spending and investing by allowing for the accelerated depreciation of their value instead of writing that value off over the full useful life of the asset.
In 2023, the bonus depreciation rate is already dropped to 80%, and it’s going to continue decreasing by 20% increments until hitting 0% in 2027 and beyond.
Taking this decrease in the bonus depreciation rate into consideration, businesses are better off taking advantage of IRS code section 179 in concert with 168(k) sooner rather than later.
Example Use of Section 179
Under these deductions, a company can invest in new equipment this year and include the total cost of the purchase as a tax-deductible expense.
For instance, if the company is relying on legacy printers, desktop workstations, and outdated network infrastructure, and they spend $200,000 on digital office infrastructure, the net cost will be $130,000.
This assumes a tax bracket of 35% applies, helping the company save $70,000 on its annual taxes.
Note that the same deduction applies whether the company opts for direct investment, financing the purchase, or leasing devices from suppliers.
What Section 179 Means for Your Business
Since the early 2000s, the limits of Section 179 and 168(k) have increased due to the effectiveness of the program.
While section 179 seems fairly safe, the plans to phase bonus depreciation from section 168(k) have already started in 2023 and are on pace to finish by 2027. As such, if companies want to get the most out of leveraging these two sections together, they should try to do so in the coming years.
Modern technologies continue to help companies streamline the operational process for greater revenue and improved business sustainability.
With the Section 179 program, they can reduce the costs associated with their digital transformation strategies.
Section 179 Eligible Property for Deductions
The list of qualifying equipment, technology, and other property available in Section 179 seeks to help businesses modernize operations and find efficient solutions for their daily workflows.
Section 179 eligible property includes:
- Qualified computer equipment and software
- Property listed under MACRS (the modified accelerated cost recovery system) with a recovery period of no more than 20 years
- Water utility properties
- Specified plants
- Qualified improvement property
- Qualified film and television productions
- Qualified live theatrical productions
- Other listed property
While buildings may fall under Section 179, it depends on the circumstances and utilization of the building or facility within the specific financial year.
Section 179 and Software Purchases
The qualified list of assets also provides for software purchases. More SMBs are using their allowances to improve the software systems they use on a daily basis.
The qualifying criteria for software require it to be COTS (commercial off-the-shelf) products and be used for income-producing activities.
Custom software doesn’t fall under Section 179, and databases only qualify if incidental to the successful operation of other qualified software.
Takeaways from Section 179 Tax Allowances
While the limit for tax section 179 increased once again this year to $1,160,000, the bonus depreciation offered by section 168(k) has started to be phased out with an initial 20% drop. The bonus depreciation rate will continue to drop steadily from 80% down to 0% in 2027 as things are currently planned.
Paying attention to the ever-changing tax code is vital for businesses as it can often offer a competitive edge budgetarily. If you aren’t already, consider using section 179 deductions to amplify your reinvestment power.
- Covers a variety of investments: Companies can opt to lease, finance, or directly purchase the equipment and still apply for the deduction
- Applies only to 2023: All qualifying assets need to be purchased and put into service between January 1st and December 31st of 2023
- Bonus deductions are available: After the Section 179 allowance limit, there’s an additional bonus deduction available for more savings, typically used by larger businesses
Finding the right tech solutions for your organization isn’t always as easy as it seems it should be. For some insight on how to start leveling up your processes with the right tech in Impact’s webinar, How to Identify High-Value Opportunities for Innovation.