Feb 14 2020

Big Tax Deductions for Tech Purchases

Companies can get tax breaks when they buy hardware, off-the-shelf software and other technology.

For businesses that have been eyeing new notebook computers, more powerful servers for the data center or faster Wi-Fi for the office but haven’t pulled the trigger due to budget concerns, there’s good news: The federal government wants to help. That aid comes in the form of a substantial tax deduction for technology purchases every year.

Section 179 deduction of the tax code and bonus depreciation allow companies, big or small, to write off technology and equipment spending in one year, rather than use the normal depreciation schedule, which for hardware is typically five years.

“It can reduce your taxes,” says accountant Michele Hinderer, owner of Hinderer Tax & Accounting in Garden City, Idaho. “Let’s say you bought a $5,000 piece of equipment. You can spread that over five years or take the $5,000 deduction all at once and reduce your taxable income by $5,000.”

What Is Section 179 and Bonus Depreciation?

The amount of the Section 179 deduction for the 2019 tax year is $1 million; it increases to $1.04 million for the 2020 tax year. However, Section 179 limits how much companies can spend on equipment to qualify for the full deduction.

In 2020, the spending limit is $2.59 million, up from $2.5 million last year. Every dollar spent above the limit must be subtracted from the deduction. The deduction was originally limited to $25,000, and for most small businesses, that was more than enough. But since 2003, lawmakers have steadily increased the deduction to encourage businesses to invest in their companies, while helping to stimulate the economy.

Companies can also apply 100 percent bonus depreciation for the 2019 and 2020 tax years, which increases the amount of technology and other equipment that companies can deduct each year.

Technology that qualifies for the tax breaks includes servers, computers, tablets, networking equipment and off-the-shelf software. Office equipment, furniture, alarm and security systems, and some vehicles also apply.

MORE FROM BIZTECH: Learn why now is the time to consider DRaaS for your small business.

How the Section 179 Deductions Work

Companies can use Section 179 and bonus depreciation alone or in combination to write off as much as they can in a single year. For example, if a business in 2019 purchased $2.6 million in equipment, that is $100,000 over the Section 179 spending limit. They can deduct $900,000 immediately using Section 179 and then immediately write off the remaining $1.7 million in equipment spending or choose to deduct the $1.7 million over the normal depreciation schedule.

There are some differences between the two tax credits, which may cause businesses to use one or the other. For example, companies cannot use Section 179 to create a loss or if they operate at a loss. But businesses that operate at a taxable loss still qualify for bonus depreciation. Some businesses may want to increase a loss to offset income from other sources. Net operating losses can also be forwarded into the next year.

Companies should consult their accountants on whether to take advantage of Section 179 or the bonus depreciation because it may not make the most financial sense to take the entire tax write-off up front, says Julian Block, a tax attorney in Larchmont, N.Y. 

A company may derive more financial benefit if it expenses the equipment under the conventional depreciation methods rather than all at once, Block says.

“A company that is just starting out and getting things going the first year may wind up with a loss and no tax liability, and it would be preferable to forego the immediate expensing,” he says.

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