How Can I Get an Extra Tax Benefit in 2021?

As we begin the 4th quarter of 2021, and businesses are looking for ways to minimize their tax exposure and maximize financial benefits, we advise you to consider the number 179. The number 179 stands for the 179 Tax Law. Also known as the 179 Tax Deduction, the 179 Deduction, or Section 179, it is a part of the US tax code that was developed to incentivize small and medium sized businesses (SMB’s) to invest in business equipment.

These tax deductions allow SMB’s to save substantially on their tax bills when they buy or lease business equipment during 2021. In fact, recent changes to Section 179 allow companies to write off even more of their tax burden when they invest in their businesses. But there is one caveat – if you want to take advantage of Section 179 for the current tax year, you need to purchase or lease equipment before December 31, 2021.

The message we want to send clearly is that you have about 3 months left in 2021 to take advantage of the tax savings of Section 179.

Section 179 Explained
Section 179 allows SMB’s to write off the purchase cost (for a cash deal), finance cost, or qualifying lease cost of qualifying office or business equipment that was acquired during the current tax year. Generally speaking, Section 179 has specified that companies must spread the acquisition cost of the equipment over time, with the deductions being front-end loaded to help soften the financial burden of the initial investment. If the equipment is leased, the lease must be structured as a “$1 buyout” or “capital” lease, as opposed to a “Fair Market Value” or “FMV” lease.

The chief purpose of the 179 Tax Law is to help businesses invest in themselves by purchasing new business equipment today and then realize the tax benefit for 2021 and beyond. Both new and used equipment qualifies for the deduction, as does certain off-the-shelf business software. The other condition is that the office equipment to be written off must have been in use 50% of the time during the tax year.

When businesses lease or finance their business equipment over time, Section 179 allows the full acquisition cost to be deducted from taxes without actually paying out the full acquisition cost in the current tax year. This could mean that the tax savings for that tax year might be higher than the actual lease or finance spend on office equipment for that same tax year.

What Business Equipment Qualifies for Section 179?

In order to qualify for Section 179 tax savings, the business equipment (formally referred to a “business personal property” in “Tax Speak”) must meet the following criteria:

  • The equipment must be a tangible item. In other words, it must be physical in that it can be touched. The equipment must be able to be depreciated within IRS guidelines, and it must be purchased, financed with a loan, or leased via a capital or $1 buyout lease. The equipment must also be used for a business purpose.
  • The equipment or devices must be used during the same tax year that the deduction is claimed. “Use” means that the business personal property in question is installed, operating, and in use for a business purpose at least 50% of the time.

The following business equipment categories are allowed to be fully deducted under Tax Law 179:

  • General office equipment like telephones and computers
  • Office furniture
  • Postage and mailroom equipment
  • Copiers, printers, and MFP’s
  • Interactive whiteboards
  • Wide format printers
  • Other equipment not specified here (consult with a business tax expert for details)

The focus of Section 179 has evolved over time. It wasn’t always focused on tax deductions for qualifying office technology equipment. Early on the tax law was geared towards business vehicles like cars and trucks. The full deduction can still be used for business vehicles, as long as they don’t exceed a specified amount of use for personal purposes. The maximum 2021 deduction is $1,000,000.00. The new phase-out limit is $2,5000,000.00.

It is not yet known if there will be new higher deduction amounts in Section 179 as new Biden-era budget and spending bills are passed into law.

What Do I Have to Do to Get The Deduction?

The first thing you must do to enjoy the tax benefit of Section 179 is to purchase, finance, or lease some qualifying business equipment, like a printer or a copier. Then begin using it. Be absolutely sure you keep records like receipts, contracts, and other business documents related to your equipment acquisition(s). You may also need to provide evidence of use, such as service records, repairs, and other documentation to demonstrate that you actually used the equipment during the specified tax year.

Talk to Your Tax Professional

Then you simply take the appropriate deduction on your taxes. Be sure to consult with your tax expert to ensure that your deductions are consistent with IRS regulations and policies. Be sure to use IRS Form 4562 to document your deductions. Again, your tax expert should be able to do this for you assuming you kept detailed records during the tax year, and you are able to provide them to your accountant at filing time. In a perfect world, as a business owner, you would consult with your tax professional BEFORE making a business equipment purchase that you would want to deduct taxes under Section 179. That way there will be no unpleasant surprises at tax time when you were expecting that fat deduction, but your accountant tells you that it doesn’t qualify.

A tax professional can also help you find other tax deductions that your business may qualify for. Many business owners will do their own taxes or they will use internal accounting personnel to prepare and file their business taxes. That is probably a bad idea. Many times a qualified tax professional can find deductions and other tax benefits that more than pay the fees associated with tax preparation and filing.

Take Action Now for a 2021 Tax Deduction!

The great thing about Tax Law 179 is that just about every purchase of business equipment qualifies for the tax deduction. Your tax professional can advise you, but chances are excellent that a legitimate acquisition of business personal property is going to qualify. Remember, the intent of the deduction is to incentivize SMB’s to invest in their operations. Be advised that Section 179 is likely to be different under the Biden 2022 tax legislation, so be sure to make your purchases with enough time to put the equipment to work so you can qualify for a tax year 2021 deduction this year.

October 4th 2021