By: Conley Smith on December 18th, 2020
10 Things to Know About $1 Million Tax Break
Are you thinking you’ll be busier in 2021 than in 2020? If that’s the case—it may be a great time to add new construction software or new or used equipment and deduct all of it on this year’s taxes.
Call it a win-win for small-to-medium size businesses, Section 179 of the U.S. Tax Code allows businesses—including those who make their living in construction—to expense $1,040,000.
This deduction is good until the total equipment purchased for the year exceeds $2,590,000. Once your purchases exceed that number, the deduction is reduced on a dollar-for-dollar basis.
The only catch—you must purchase and start using any software or equipment before the clock strikes midnight on Dec. 31, 2020. To help you get your arms around the ins and outs of this tax break—we pulled together some FAQs.
Here are 10 things you should know when claiming your Section 179 tax deduction:
1. How Much Can I Write-Off?
You can only write off the amount you spend on qualified purchases. For example, if you spend $10,000, you can write off $10,000. Also, you can’t deduct more than your profit. If your business only has $100,000 in profits, you can only deduct $100,000.
This means if you buy $50,000 worth of equipment, you can deduct the entire $50,000 from your taxable income. At a 35% tax rate, that would result in a net tax savings of $17,500.
2. Is There a “Phase-Out Threshold”?
Yes, it is $2.5 million. This means a business can spend up to that amount in total equipment before the $1 million limits begin to be reduced dollar for dollar.
3. Are There Any Other Rules To Be Aware Of?
Yes, any purchases—from trucks to software—must be used for business purchases more than 50% of the time to qualify for the deduction.
4. How Much Can I Save on My Taxes This Year?
It depends on how much qualifying equipment and software you purchase and put into use this year. This Section 179 Calculator can show your expected tax savings.
5. What Sort of Construction Equipment Qualifies?
Most tangible business equipment, both new and used, qualifies. This means production machines and related equipment; office machines and furniture; computers and common software; safety equipment; most signage; business vehicles in excess of 6,000 pounds gross vehicle weight (including heavy equipment); and more.
Also, Section 179 is not affected by how a company pays for the purchase. In fact, many companies like doing this because the tax money saved almost always exceeds the payments made during the calendar year.
The equipment listed below must be purchased and put into use between January 1 and December 31 of the tax year you are claiming. It can be new, used, purchased, leased, or financed:
- Equipment (machines, etc.) purchased for your construction business
- Tangible personal property used in business
- Business vehicles with a gross vehicle weight in excess of 6,000 pounds
- Computer “off-the-shelf” software
- Office furniture
- Office equipment
- Property attached to your building that is not a structural component of the building
- Partial business use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes)
- Certain improvements to existing non-residential buildings: fire suppression, alarms and security systems, HVAC, and roofing
6. What Software Qualifies?
For basic eligibility, the software must be “off-the-shelf,” like takeoff and estimating software.
This means it has not been substantially modified and is available for purchase from the general public. It must also meet all the following general specifications:
- Purchased or financed with specific qualifying lease or loan
- Used in your business for income-producing activity
- Have a determinable useful life
- Must be expected to last more than one year
7. What Are Section 179 Nonqualifying Property?
Most normal business equipment purchased for your construction business will qualify. Here are some examples of the property and equipment that will NOT qualify:
- Real property like land, buildings, permanent structures, and the components of the permanent structures, including paved parking areas and fences
- Property used outside the United States
- Property that is used to furnish lodging
- Property acquired by gift or inheritance, as well as property purchased from related parties
- Any property that is not considered to be personal property
8. How Long Do I Have To Purchase?
Section 179 always expires at midnight, December 31st. To take advantage of Section 179 this year, you must buy (or lease/finance) by December 31, 2020.
9. Can I Use Section 179 Every Year?
Yes, Section 179 can be used every year. It was made a permanent part of our tax code with the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).
10. What’s the Difference Between Section 179 and Bonus Depreciation?
Bonus Depreciation is taken after the Section 179 deduction is taken, which is helpful for very large businesses spending more than their Section 179 spending limit. Also, businesses with a net loss in a given tax year qualify to carry-forward the Bonus Depreciation to a future year. When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation—unless the business has no taxable profit in the given tax year.
COVID-19 and Section 179
Over the years, Section 179 has evolved into one of the most effective small-business tax deductions available. With so many construction projects put on hold, delayed, or cancelled in 2020, this tax break is more important than ever.
Even if you received Paycheck Protection Program or other COVID-19 related funds, the Section 179 write-off is still applicable as long as you follow the guidelines. It is also likely you can write-off equipment you purchased to modify your workspace for COVID-19, such as plexiglass dividers, air filtration systems, sanitizing stations, or new servers for work-at-home teams.
As always, ask your accountant or tax professional for the final word on your Section 179 purchases.
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