Tax codes might not be the most thrilling topic for business owners, but understanding a few basics can set you up for success. As we approach the end of the year, one particularly helpful tax code to keep in mind is Section 179. This IRS provision could help you accelerate your tax savings this year, making it a powerful tool for your business.
What is Section 179?
Section 179 allows businesses to deduct the full cost of qualifying equipment purchased or financed during the tax year, rather than using standard depreciation to write off smaller amounts over several years. This makes Section 179 particularly attractive when you need a significant deduction to reduce taxable income or want to accelerate tax benefits into the current year.
For 2024, businesses can deduct up to $1,220,000 of the cost of qualifying equipment. While this offers substantial benefits, there are some limitations to consider, which we’ll cover later.
Real-world example
To see how Section 179 works in practice, let’s look at a hypothetical scenario involving a sign and graphics shop. Suppose the shop purchases a new printer for $50,000 and opts to deduct the full amount under Section 179. Assuming the shop falls into a 30% tax bracket (federal and state combined), this would result in a $15,000 tax savings for the year. The net cost of the printer is effectively reduced to $35,000.
But the advantages don’t stop there.
Even if the shop finances its new printer with a loan or a capital lease, it could still claim the full $50,000 deduction. This approach allows the business to maximize its tax deduction while spreading the actual payments over several years. The shop enjoys immediate tax savings and the operational benefits of the new equipment, all while minimizing the impact on its cash reserves.
This flexibility is particularly beneficial for businesses with tight budgets or those looking to manage their cash flow more effectively. By financing the equipment and still taking advantage of the Section 179 deduction, businesses can continue to invest in growth without sacrificing liquidity.
What equipment qualifies for Section 179?
A wide range of equipment qualifies for Section 179 deductions. This includes essential items like wide-format printers, screen-printing presses, dryers, embroidery machines, and laser engravers — nearly any equipment you need to run your business in the graphics industry.
The versatility of Section 179 is one of its most appealing features. It’s not just about big, industrial equipment; it can also apply to smaller, everyday items that are crucial to your business operations. Items like vehicles, computers, software, and office furniture used for business purposes may also qualify. Even certain improvements to your office building might be eligible.
There are two key requirements to keep in mind:
- The equipment must be used for business purposes at least 50% of the time.
- The item must be acquired and placed in service before the end of the tax year — Dec. 31, for this year’s deduction.
Plan ahead for year-end tax savings
Given the Dec. 31 deadline, it’s smart to think ahead. If you’ve been considering an equipment purchase, now might be the perfect time to act. Manufacturers often experience higher demand toward year-end, leading to potential delays in production and delivery. Waiting until the last minute could mean missing out on the Section 179 deduction.
By planning your purchase now, you not only secure your tax deduction but also avoid any price increases and ensure your new equipment is up and running before the Dec. 31 cutoff.
Limitations & special requirements
While Section 179 offers significant benefits, it’s also crucial to understand the code’s limitations.
First, the maximum deduction under Section 179 in 2024 is $1,220,000, making it ideal for small to medium-sized businesses. However, for larger companies or those with minimal taxable income, the benefits might be limited. The deduction begins to phase out when total equipment purchases during the year exceed $3,050,000.
Additionally, Section 179 cannot be used to generate a loss on your income tax return; the deduction is limited to your taxable income.
Some states impose their own limits on the Section 179 deduction for state income tax purposes, so it’s crucial to be aware of your state’s specific rules.
As mentioned earlier, timing is another important point to consider. The equipment must not only be purchased but also installed and in use by Dec. 31, to qualify for this year’s deduction.
The final word
Section 179 presents a valuable opportunity for businesses in the printing industry to invest in new equipment while reducing their tax burden. However, as with any tax-related decision, it’s essential to consult with a tax adviser to understand how this IRS tax code applies to your specific situation.
Whether you decide to finance your equipment or pay upfront, taking advantage of Section 179 can help you achieve your growth objectives while keeping more money in your pocket. By planning ahead and making strategic equipment purchases before the year ends, you can position your business for success in the coming year.
