Section 179 Tax Deduction

When trying to start and scale, small businesses are faced with many costs. Machinery, equipment, and other tools like geospatial solutions can quickly add up. While these costs can certainly be overwhelming at first, the Section 179 tax deduction can help ease the impact these costs have on your business by enabling your company to purchase and begin using assets. It's important to note, though, that only certain property qualifies for the Section 179 tax deduction.

Continue reading to learn what you can claim under Section 179 to help your business's bottom line. Then, be sure to maximize this tax season by taking advantage of all tax deductions and credits.

Bonus Depreciation vs. Section 179 Deduction

To maximize savings, it's important to understand the differences and similarities between Bonus Depreciation and the Section 179 deduction.

Bonus Depreciation

Unlike Section 179 which allows you to deduct a certain amount of new business assets, Bonus Depreciation enables you to deduct a set percentage of the cost. In 2022, the set percentage is 100%. It's important to note that Bonus Depreciation is offered in some years but not others. Bonus Depreciation may apply to greater spending in a year, while Section 179 offers more flexibility on when you can receive your deduction. Additionally, there are no annual limits on deductions with Bonus Depreciation.

Section 179

What is Section 179? The Section 179 tax deduction is an incentive intended for businesses that spend less than $3.78 million per year. If your business qualifies, then you're allowed to deduct the entire cost of equipment the year you purchase it as long as you begin using it that same year. This is beneficial because instead of using depreciation to slowly write off equipment purchases, this tax incentive allows you to write off the total cost of the qualifying equipment you buy.

What Qualifies Under Section 179?

Only certain equipment purchases qualify for the Section 179 tax deduction. To qualify for a write-off under Section 179, equipment and materials can be new or used. Also to qualify, it must be the first time your company has purchased this equipment and it must be put into use during that same tax year.

Equipment that qualifies under the Section 179 tax incentive includes:

• Geospatial and surveying equipment such as robotic total stations and GNSS receivers
  
  
• Geospatial and surveying software such as data collection software and data processing software
  
  
• Construction laser levels
  
  
• Drones and mobile mapping equipment
  
  
• Wide format printers

Vehicles used for business purposes may also qualify for Section 179 write-offs, including vehicles that weigh over 6,000 pounds and are used for business the majority of the time. Examples include heavy construction equipment, cargo vans, ambulances, large passenger vans or taxis.

The main way that Section 179 tax deduction differs from Bonus Depreciation is that it can only be deducted up to a business's taxable income. Also, while Bonus Depreciation enables you to distribute the cost over many years, Section 179 deducts the entire cost upfront. However, it is possible to use both of these in the same year to reduce your state and federal income taxes. Companies will often utilize Bonus Depreciation after they've reached the Section 179 spending cap.

How Does Section 179 Benefit Businesses?

Section 179 benefits businesses by allowing them to deduct the total purchase price of newly purchased machinery, vehicles, and equipment before the loans are paid off. Investing in new equipment for your business can be expensive, but Section 179 can help make it easier by allowing businesses to receive the deduction for purchases all at once rather than over several years.

For companies trying to gain market share, purchasing new equipment can come at a high cost. However, Section 179 is designed to incentivize small businesses to invest in their growth and immediately implement new equipment. Section 179 can also be more cost-effective for small businesses.

Getting this deduction quickly can provide major tax relief, especially for new businesses needing to purchase startup equipment. To qualify for this deduction, the purchase price of equipment must fall within the dollar amount ranges and other specifications outlined in Section 179. If the purchased equipment also qualifies for Bonus Depreciation, then you can lower your tax bill even further.

What Are the Limits of Section 179?

While the Section 179 deduction benefits businesses by letting them write off equipment, it has its limitations, including an equipment purchase cap and deduction limit. Section 179 limits the maximum deduction to a company's net income, preventing companies from deducting more money than they made. In 2022, the deduction limit of Section 179 is $1.08 million.

This limit means that businesses can only purchase a specific amount of equipment before the deduction starts to decrease dollar by dollar. According to Section 179 property limits, the maximum a business can spend on equipment purchases is $2.7 million. Also, if a company spends more than $3.78 million per year it cannot qualify for the Section 179 tax incentive, since it is intended only for small businesses. However, larger companies can take advantage of the current 100% bonus depreciation rate.

To claim Section 179, your purchases must qualify for the tax incentive since Section 179 does not cover certain property and equipment.

Property not covered by Section 179 includes:

• Land and landscaping
  
  
• Swimming pools and docks
  
  
• Real estate or buildings
  
  
• Improvements made to a property before construction is completed and the building is in use
  
  
• Escalators and elevators
  
  
• External building improvements done to expand the building's size or alter its framework
  
  
• Fences
  
  
• Billboards and non-mobile trailers
  
  
• Intangible assets such as patents, copyrights or brands

Other characteristics that may disqualify materials and property include if it's:

• Acquired through inheritance or as a gift
  
  
• Belonging to the government or a tax-exempt organization
  
  
• Used for trade purposes or business less than half the time

How Can Your Business Benefit From Section 179?

To benefit from this incentive, companies must include Section 179 in their tax return since it does not automatically apply. Continue reading for the steps you need to take for your business to benefit from Section 179.

Consult With a Tax or Legal Professional

A legal or tax professional can help you determine whether it's more beneficial for your business to take advantage of Section 179 or Bonus Depreciation. Generally speaking, it's more cost-effective to claim the total price with the deduction than allowing assets to depreciate, since it takes several years to reap the full benefits of depreciation.

Since the tax incentive is only for small businesses, it is more beneficial to deduct the complete cost upfront so that you can begin profiting from the new equipment. For larger companies, an expert can outline how to benefit from Bonus Depreciation.

A tax professional can also confirm whether or not an asset qualifies for the Section 179 deduction. In order to be eligible, an asset must be tangible, purchased, and used specifically for your business. A tax professional will know how to navigate tax regulations and laws and will have an understanding of deductions that might be confusing for individual taxpayers and business owners. Working with a trusted tax professional will ensure your business' taxes are done correctly.

Account for All Purchases

You should the limits and which items qualify for Section 179 to get the maximum benefit from this tax incentive. Overall, assets must be purchased or leased, used at least half the time for business, tangible, and cannot have been acquired as a gift. A tax professional can help you assess your assets to determine which ones qualify for Section 179.

You'll also want to confirm when you began using the equipment. One of the main advantages of Section 179 is that businesses can purchase and begin using an asset immediately. Companies must begin using an asset within the tax year they claim it to qualify. For example, if your company purchases an item at the end of 2022 but doesn't use it until 2023, then you're only able to claim that deduction for the 2023 tax year.

Claim the Deduction

Once you've reviewed your assets, you can claim the deduction on Part I of Form 4562. Note what property you'd like to write off on line 6, including its price and the Section 179 amount you're claiming for that item. Then, include this form with your tax return so you can start benefiting.

For example, if your small business purchases a new piece of equipment for $50,000 with no salvage value and it is used completely for business purposes, your company could write off a portion of that asset each year as it depreciates. However, with Section 179, your company could write off the entire $50,000 purchase in just one year. This would provide your business with significant savings when it needs it most.

How Does it Apply to Surveyors?

Independent surveyors and other small business owners can utilize Section 179 to invest in equipment, machinery, and other tools. New equipment and tools are more accessible to small businesses thanks to Section 179, making it easier to stay up to date with the latest technology and limit depreciation.

Companies can profit immediately by receiving a larger deduction all at once rather than over several years. As an added benefit, the sooner your company begins using new equipment the sooner your company can assess previous assets and identify new needs. This deduction can also help offset costs associated with the ongoing labor shortage in many industries.

Other Common Tax Deductions

Along with the Section 179 tax deduction, companies and surveyors can also claim other types of tax deductions, including mileage and vehicle-related costs, advertising charges, the price of equipment, and deductible fees. Employees may also be eligible for some lifelong learning tax credits as well.

Mileage

For many industries, work-related fuel costs can be a significant expense for companies and employees. Oftentimes, workers will use company cards to pay for gas when traveling for client visits as well as to and from the office and job sites, or when purchasing new equipment and tools.

Actual expense or standard mileage is used by the IRS to determine the annual cost of your vehicles. Expenses should be calculated by using both of these to identify which deduction is larger. However, during the first year you begin to use a vehicle for business purposes, standard mileage must be used.

When using actual expenses, you must calculate the total operating expenses for your vehicle, including:

• Insurance fees
  
  
• Leasing payments
  
  
• Maintenance
  
  
• Gasoline
  
  
• Washes
  
  
• Oil changes
  
  
• Title, registration, and licensing fees
  
  
• Depreciation

A more straightforward way to determine your vehicle's expenses is standard mileage since you only have to track a vehicle's total mileage for the year. To do this, just multiply the number of miles your vehicle has been used for business purposes by the standard mileage rate for that tax year. This rate will change from year to year, but for the final half of 2022, you can deduct 62.5 cents per mile of business travel. For the first half of 2022, the mileage rate is 58.5 cents. Remember, standard mileage only covers the miles a vehicle has been used and does not include other expenses like repairs.

Tools, Machinery, and Equipment

Tools and equipment can also be written off, such as personal protective equipment for the field. Specialized equipment, such as tool belts, hard hats, uniforms, and steel-toed boots can be deducted if the employee was not reimbursed for them. The cost of tools can be completely deducted from the year you purchased them using Section 179. Other equipment may depreciate over multiple years.

Advertising

Companies may also be able to claim the costs associated with marketing and advertising. While marketing efforts attract new leads and customers, advertising can be used to spread the word about your company. While organic results may occasionally happen for companies, it's still important to invest money into marketing and advertising. Be sure to keep records of all print and digital advertising charges, such as expenses associated with producing marketing materials, like video equipment, paper, and printing costs.

Deductible Fees

Professionals like surveyors can continue to grow their skills to keep up with changing technologies and maximize career success. The costs associated with professional development initiatives can be deducted, including:

• Tuition for trade school and training
  
  
• New licensing and license renewal fees
  
  
• Subscriptions and memberships to industry organizations, unions, and associations
  
  
• Subscriptions to technical journals and trade publications

Deducting costs for professional development initiatives and continuing education can help your bottom line when it comes time to file taxes. However, only the costs of furthering your education within your current career path can be deducted, not training done in preparation for a career change.

Instead of collecting an education deductible, you can also apply for tax credits. The Lifetime Learning Credit, for example, covers $2,000 per student, while the American Opportunity Tax Credit covers a maximum of $2,500 annually.

Partner With Duncan-Parnell

As an authorized Trimble dealer, HP-wide format printer distributor, and trusted supplier to surveyors, construction contractors, engineers, architects, and designers, we can help you maximize efficiency while minimizing costs for your growing small business. With locations and team members throughout the Southeast, we are equipped to provide local service and support your business needs. Contact our team at Duncan-Parnell today to discover how our solutions and services can maximize your profits!

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