Every business owner knows the many challenges that come with running a successful company. Organizations that are small and independent have to juggle an array of costs associated with doing business.
If you own a small business, you’ve probably had to deal with the problem of the increasing cost of supplies and raw materials as market conditions fluctuate. Energy costs have risen in many parts of the country and higher wage requirements have put a strain on small businesses. It’s also necessary at some point to invest in new equipment for upgrades and expansion.
There are a few ways to manage the high cost of essential machinery and tools for your line of work. One easy and popular method to help increase your bottom line comes with tallying your tax bill each year. While you’ll still have to calculate your yearly corporate taxes every April, you can relieve some of the burden by itemizing your business expenses.
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Another way you can specifically lower your business’s tax bill is by using the Section 179 form when you file your annual taxes. Section 179 offers small business owners a way to save money, sometimes in consecutive tax years, on pricey items by allowing them to deduct the full cost of equipment and other business purchases. This way, you don’t have to go with the typical deduction for business purchases involving depreciation and capitalization reporting.
Here are some other things to know about Section 179 before you compile your tax forms for this year.
Does Your Business Qualify?
The first thing to figure out with this deduction is whether or not your business is eligible to use it. If you operate a small business, chances are you qualify. Additionally, any equipment you want to claim on your tax form for the year must not add up to more than $2 million. Both new and used equipment purchases for your operation can be added to a Section 179 deduction.
It is, however, required that your equipment is used for at least 50% of its lifespan for business purposes. So, if you are trying to deduct the cost of your vehicle, it must primarily be a company or fleet vehicle instead of a personal one.
What Kinds of Costs Can Be Deducted?
Any business equipment that you purchased and started using during the calendar year for which you are filing your taxes can be claimed as part of this specific deduction. Some examples of items used for the Section 179 deduction include:
- Office furniture
- Computer hardware
- Computer software
Some other types of items you purchase for your business can sometimes be used for the Section 179 deduction, depending on the specifics and your usage. For example, real property can be eligible if it’s a restaurant, retail or another qualifying business. Heating and air conditioning unit purchases may also be eligible if they are portable or primarily for a business property.
There are certain types of equipment that are never eligible for receiving this deduction. Paved areas or parking lots cannot be deducted with this form. Items located outside of the United States are not eligible and gifted or inherited items or property cannot be claimed.
What Are the Limits?
Over the past few years, Congress has consistently passed tax relief and stimulus bills to keep these limits attractive to business owners. Though, like most types of deductions used in corporate expensing for tax purposes, there are some limits to the Section 179 form. At the time of this publication, you can deduct up to $500,000 for your annual purchases. As previously mentioned, equipment purchases must not add up to more than $2 million.
Equipment purchases should be kept separate from other business expenses. When you separate your costs, you may be able to take advantage of additional savings by deducting the equipment’s depreciation value in the tax years after your initial purchase. This means you can continue to recoup some of the cost of your investment.
How Can You Use This Deduction This Year?
If you want to get in on the tax relief that thousands of small business owners have already taken advantage of, elect to take this deduction when you file your end-of-year taxes.
First, you’ll need to fill out the top part of form 4562. Use this form along with your regular tax filing forms.
It may be wise to get help preparing your business taxes if you’re not sure what needs to be done. You’ll also be better prepared for a potential audit if you seek some tax assistance. Of course, you can try purchasing business tax software to make your filing woes less expensive and easier to manage. But if you have a lot of complex situations and need more advice, try hiring a professional accountant.
Section 179 Deduction Benefits You
While it may seem complex and time-consuming to review your business spending and to check to see if you qualify for this deduction, the end result could greatly help your business’s financial state.
For one thing, using the Section 179 deduction can help you manage the cost of buying new or used equipment. This gives you an incentive to go forward with investing in upgrades and developing your business.
As the year is drawing to a close, don’t forget to take a look at your business’s annual spending to see if there are any opportunities to get some of your investment back. By designating these purchases as expenses, you may be able to help keep up with some of the rising costs of running your company. Remember, you can also claim depreciation on many of these costs, making it an even better idea to elect to take the Section 179 deduction.