The federal government allows businesses to take a tax deduction for their technology purchases every year, a financial boon to companies large and small that need to stay up to date.
At the very least, Section 179 of the tax code will allow companies to immediately write off up to $25,000 in technology, off-the-shelf software and other equipment in 2014. But if the past five years are any indication, the yearly deduction could be as high as $500,000 for 2015, with an additional bonus depreciation that increases the amount they can deduct. The final amounts will depend on what Congress and President Obama decide to do, and they have yet to reach agreement.
The higher deduction and bonus depreciation, along with 53 other tax breaks, were hotly debated during 2014. The 55 tax benefits, which first took effect in 2010, expired at the end of 2013, reducing the Section 179 deduction amount from $500,000 to $25,000 and eliminating a 50 percent bonus depreciation for 2014. But in mid-December, Congress reinstated all the tax breaks for the 2014 tax year, including the higher deduction and bonus depreciation.
Even though President Obama signed the legislation into law on Dec. 19, it was difficult for businesses to plan for their 2014 equipment purchases because the reinstatement of the tax breaks came less than two weeks before year’s end.
The new legislation does not account for 2015, so once again businesses are in limbo as far as the tax breaks go. Without renewal, the Section 179 deduction amount drops to $25,000 for 2015 with no bonus depreciation. What’s In It for You?
According to tax experts, Congress is likely to renew a higher deduction and bonus depreciation in 2015 because businesses have come to expect and rely on them. But there are no guarantees.
“If a company made purchasing decisions in 2014 and bet on the government keeping the tax breaks, then they won the bet,” says Jaime Campbell, chief financial officer of Tier One Services, which provides management accounting services for small businesses. “You can’t really say from this most recent decision that Congress will do the same in 2015, but I doubt it’ll rattle nerves by just letting those policies expire.”
For large companies that need to invest in a lot of equipment, the bigger deduction with bonus depreciation would greatly help lower their taxable income. But for most small businesses, the smaller amount is more than enough to cover their yearly technology purchases.
1. Make buying decisions based on your business’s needs, not on the amount of the tax deduction.
If you need technology or equipment to grow the business, then buy it. Even if you don’t get the full deduction the first year, you can still deduct the remaining costs under the regular depreciation schedule over the next four years.
“One way or another, you can write it off,” says Rayanne M. Buchianico, an owner of ABC Solutions in Dunedin, Fla.
On the flip side, don’t purchase technology and other equipment just for the sake of having a tax write-off.
“The biggest myth is that if it’s deductible, the tax savings pays for the equipment,” says Bob Hampton, a certified public accountant at Impart Financial in Fort Worth, Texas. “The truth is, it only saves you a percentage.”
2. Off-the-shelf software means just that.
It’s software you can buy at any store, off the shelf. Section 179 does not allow businesses to deduct custom software or even cloud-based software they subscribe to because it’s not an asset that they own. Companies can deduct cloud-based software as a period expense.
3. Technology or equipment must be “placed in service” in the year you want to take the deduction.
“You cannot order and pay for something on December 28, take delivery in 2016 and get the 2015 tax write-off,” Hampton says.
Also, placed in service doesn’t mean the technology is already in use. “It means it’s ‘ready and available’ for its intended use,” Campbell says. For example, if an IT department has purchased software and installed it on employees’ computers, but people haven’t started to use it yet, the software is considered placed in service.
4. Discuss different scenarios with your accountant.
Businesses can use Section 179 alone, in combination with bonus depreciation, or bonus depreciation alone. Matthias Weber, principal of the tax services group at Irvine, Calif., accounting firm Haskell & White, stresses that it’s important for company executives to engage their certified public accountants and explain their business plans for the next few years, so that the best tax benefits can be suggested.
“My experience is that if you do a transaction, all I’m there to do is record it,” he says. “But if you tell me your plans, I’m now your consultant, and I can help you navigate the transaction in a more favorable manner.”
5. Consider deferring to next year, under certain conditions.
“If you need the stuff and it’s late in the year, then it’s a wonderful time for tax deductions,” Hampton says. “But if you can defer it to the new year because you expect to be in a higher tax bracket next year, then it is to your advantage to defer that expense.”
Similarly, it’s not always smart to take all the depreciation up front. Buchianico says if the business has already invested in new equipment but is in a low tax bracket this year and expects higher profits in future years, then it may be beneficial to use the regular depreciation schedule and spread deductions into future years as the company reaches a higher tax bracket.