Tax Savings for Small Business Owners: Bonus Depreciation and Section 179
When making a major purchase for your business, you are expected to spread the tax deduction out over the lifespan of that purchase, which provides small tax savings over the years. But, why wait? Business owners can take advantage of Bonus Depreciation and Section 179 to invest in their businesses, resulting in an enormous tax break!
In this blog post, we will explain how the deductions work, and how you can use them to maximize your tax savings.
How Do the Deductions Work?
Section 179 allows you to deduct the full purchase price from a qualifying new or used business asset, while Bonus Depreciation allows you to deduct a percentage. Currently, Bonus Depreciation is being offered at 100%, so both options will allow you to write off the entire cost of your purchase in the same year.
There are certain criteria that the asset must meet to qualify for the deductions:
- Tangible Items. This includes, but is not limited to, physical items such as office furniture, equipment, computer software, and business vehicles exceeding 6,000 pounds.
- Interior Improvements. While land and buildings do not qualify for Section 179, interior improvements do. Examples include, but are not limited to, fire alarms, security systems, roofing, and HVAC. To qualify for Bonus Depreciation, qualified improvements must have been completed after the building became operational. Building enlargements, elevators, escalators, and any internal structural framework changes are ineligible.
- Used for Business. Assets must be used for business purposes more than 50% of the time to qualify for Section 179 and Bonus Depreciation.
There are many major purchases that business owners can make, and claim these deductions. If you have made or plan to make a major purchase for your business and are unsure if it qualifies, speak with an online accountant at Xendoo to learn more.
Are There Limits to the Deductions?
For 2021, Section 179 is limited to a maximum deduction of $1,050,000, and the total equipment purchased by a business cannot exceed $2,620,000. Bonus Depreciation is currently being offered at 100%, but is scheduled to decrease to:
- 80% after December 31, 2022 and before January 1, 2024.
- 60% after December 31, 2023 and before January 1, 2025.
- 40% after December 31, 2024 and before January 1, 2026.
- 20% after December 31, 2025 and before January 1, 2027.
If you are considering utilizing Bonus Depreciation, now is the time to do so, as the percentage you can claim will start to decrease soon.
Section 179 allows you to split the deduction over time. For example, you could write off half of the purchase up front and spread out the rest over the next few years, allowing for greater flexibility on your deduction. It should also be noted that your business must have a taxable profit to claim Section 179, as the deduction is limited to your business’s net income.
For example, if you have a net income of $60,000, and you purchased $70,000 worth of equipment, the deduction will be limited to $60,000. You can carry the remaining $10,000 deduction into the next year, as long as your income allows for it.
Bonus Depreciation requires that you deduct the entire cost within the year. However, there are no income restrictions on this deduction, unlike Section 179. Even if you make a purchase that exceeds your net income, there will not be a limit to the deduction, as it covers 100% of the purchase.
Business owners can claim both Section 179 and Bonus Depreciation, but Section 179 must be taken first. They must also be applied to different purchases. For example, you could claim Section 179 for a business vehicle, and Bonus Depreciation for office furniture. Consult with one of Xendoo’s online Tax CPAs to discuss all your options.
Maximized Taxes. Minimize Stress.
Bonus Depreciation and Section 179 can provide substantial tax breaks for your business. The Xendoo team is here to help you maximize your tax savings with these incredible opportunities!