All About Section 179 and Software & Hardware Purchases

For many organizations, investing in new tech is usually an afterthought, yet it shouldn’t be. Companies that invest strategically in IT infrastructure magnify their operational abilities, eventually outperforming their peers. If every company backed their overall corporate strategy with a solid technology plan, we would have more and more businesses growing into industrial powerhouses. IT purchase decisions are usually not the easiest to make. Great software rarely comes cheap, and yet we know how new tech can take your company to new levels with boosted productivity and functions.

Even though it might be hard to get through, spending on new tech is always necessary for any firm that wishes to remain competitive. The good news is that some of the expenses incurred may qualify for IRS tax deductions, improving your cash flows. Section 179 may be the perfect gift for small businesses planning to upgrade their IT software and hardware equipment.

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What is Section 179?

Under the IRS revenue regulations, Section 179 is a code outlining expense deductions that business owners can make for purchases of depreciating business equipment. It makes more sense to expense equipment with a shorter lifespan in the current financial year rather than capitalize on it for future depreciation. The entire purchase amount may qualify for immediate expense deduction. Companies can make massive savings from reduced tax liabilities by taking advantage of Section 179.

Section 179 helps reduce the cost of purchasing software and hardware for your business. Sometimes the investment in IT equipment can be substantial, and it helps that you can merely buy the equipment and make the entire deduction from your annual gross income. Sometimes applying the expense may not be a straightforward process, and you might need professional tax services.

What Qualifies for Section 179 Deductions?

Section 179 is available to small and medium-sized businesses that make qualifying equipment purchases for the year.  Before it gets a bit too technical, one thing that you must remember is that everything bought must be put to use in the current tax year for it to qualify for the deduction. For instance, when you buy hosted virtual desktop services from 4BIS.COM, it should be operational immediately if you wish to claim the expense for the same year.

You might want to know what technological products will qualify, and here are a few of them:

  • Purchase of new equipment, for example, computer workstations, network servers, and hard drives.
  • Purchase of used/refurbished equipment.
  • Purchase of software (it must be off-the-shelf software).
  • For the mentioned items to qualify, they must have been used for business purposes (or at least 50% ). For qualifying software, you must show proof of use in an income-producing activity, provided you expect to use it for at least one year. You can also claim for financed software.

What is off-the-shelf software?

There are two kinds of software; custom software and off-the-shelf software. Off-the-shelf refers to software that is standardized for general functions and is available to the public for purchase. Examples include email applications and phone and VoIP software. It is usually favored as an IT solution fit for everyone and is generally cheaper and more convenient.

How to Use Section 179 To Make  Tax Savings on Software Purchases

We have some information to get you started, but you need a tax accountant to help you navigate the complex IRS regulations. To claim a Section 179 deduction, you need to fill out form 4562, available on the IRS website. It pays to stay up to date with changes to the codes under Section 179, as it is known to change without prior notice. Your claim must qualify within the dollar amounts specified by the code.

For example, you can expense up to a maximum of $1,050,000 on your gross income for any hardware and software investments. If your purchase goes above this limit, the extra expense qualifies for bonus depreciation. You can claim the entire purchase price on financed equipment even if you have staggered the finance repayments over several years.

What Doesn’t Qualify for Section 179 Deductions?

The custom code is not eligible for deduction. Also referred to as bespoke software, custom software is designed and deployed for a specific user or organization. Bespoke solutions are not for everyone, unlike off-the-shelf software, which is available for anyone to purchase.

A database is not eligible unless it is available to everyone, and it affects the operations of qualifying software.

What Else is Claimable Under Section 179?

Software is becoming one of the most popular uses for 179 deductions. There are a few more items considered as qualifying by the IRS, including:

  • Office furniture and equipment
  • Machinery for business use
  • Business vehicles (whose gross weight exceeds 6,000 lbs.)
  • Improvements to commercial buildings, for example, HVAC and fire equipment
  • Additional fixtures to a building for business use, e.g., attaching a printing press to a building.

If you talk to a qualified tax professional, you may find other items in your business entitled to Section 179 expense deduction.

More on Section 179: Spending Caps, Bonus Depreciation, and Deduction Limits

The spending cap is the maximum amount a company can spend before Section 179 deductions take effect on a dollar-for-dollar basis. For example, as of 2021, the spending on equipment purchases stands at $2,620,000. It makes larger businesses ineligible since they spend much more than this amount.

Deduction limit is the maximum amount you can write off in a financial year. The maximum amount that businesses can write off, as of 2021, is $1,050,000.

While depreciation deductions are usually spread over the useful life of an asset, bonus depreciation allows a substantial write-off in the first year. For example, for a business that made qualifying purchases worth $1,400,000, this is how their deductions will play out:

  • $1,050,000 first-year write off (the maximum limit in 2021)
  • $400,000 bonus first-year depreciation (100% in 2021)

Assuming the above example, the business may save up to $490,000 (based on a 35% tax bracket) on its software and equipment purchases.

Save on Software and Technology Purchases in Cincinnati with 4BIS.COM

4BIS.COM has the right tools and technologies that can help you take advantage of Section 179 to grow your business. Contact us to book a demo.

Written by James Forbis
Posted on: December 9, 2021
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