Tax Deductions for Office Equipment: The 179 Tax Law (Updated November 2020)
If you’ve been considering a new copier for your office, a new smartboard for your conference room or a postage meter that won’t jam every four envelopes, the time to buy or lease them is between now and the end of the 2021. Why? I’ll answer with three numbers: 1, 7 and 9.
Tax write-offs enable filers to save on their tax bill, and they are always evolving and changing, in most cases, to provide even more savings. For instance, this year, recent changes to the 179 Tax Deduction will enable small businesses to write off even more for their business office equipment. In fact, reports show that millions of small businesses are already taking advantage of the deduction and reaping noticeable results.
However, if you are a small business and you plan to benefit from the deduction this year, it is important to do so before the close of the 2021 tax year.
What is the 179 Tax Law?
The 179 Tax Deduction, also called Section 179 and 179 Tax Law, is a tax code enacted by the U.S. Congress that was designed to help small to mid-size businesses.
Under the 179 Tax Law, businesses can write off the total purchase, finance, or qualifying lease cost of qualifying office equipment, including software (but only if available to the general public and subject to what is called a “nonexclusive license”, which means that software that was custom-written for your business will not qualify) that was purchased during the current tax year.
In the past, in order to take advantage of tax savings for business equipment, the cost of buying the equipment had to be written off over a specified number of years, with bigger deductions allowed in the year the equipment was first purchased and put into use, which helped businesses save money on their tax return over the years.
Using the 179 Tax Deduction means if you purchase, finance, or lease certain equipment, you can deduct the total cost of the item on your tax return. If you’re leasing, remember that, to qualify for this program, your lease must be a “$1 buyout” lease.
Purpose of the 179 Law and the Benefit to a Business
Though medium-sized businesses also benefit from Section 179, the main goal of its creation was to provide more tax relief for small businesses as encouragement to invest in themselves, which helps contribute to a stronger economy. In fact, it also currently one of the few government incentives for small businesses that is also included in many new Congressional Tax Bills and Stimulus Acts.
The main benefit of the deduction is that it enables small businesses to buy necessary equipment today and then write off the total cost of any qualifying equipment up to $1,000,000 on their tax return for 2021.
The deduction includes the purchase of both new and used equipment, and it also extends to ready-made software. However, to qualify for the 179 deduction, the equipment or software must be used for business purposes more than 50% of the time.
Under Section 179, your business can also lease business personal property and still reap the full benefits of the deduction, while paying small installments. To do so, combine a qualifying equipment finance agreement or equipment lease with a full deduction.
The greatest advantage of leasing or financing business equipment in combination with Section 179 is it enables you to deduct the full purchase amount of the business property without paying the entire purchase amount this year. In some cases, the tax savings can even exceed the first year’s payments, which means you can actually earn money with your leasing or financing.
The IRS requires business personal property to meet two guidelines to qualify for Section 179:
- The property must be a physical item, meaning it can be felt or touched, able to be depreciated in accordance with the IRS rules, and personal property that is purchased, leased, or financed for the main purpose to carry out business or trade.
- The property must also be put into use in the same year the deduction is claimed. Putting the property into use means the equipment is installed, up and running, and being put to use in your business. In other words, if the equipment is simply purchased but not being used, it doesn’t qualify for the deduction.
Business personal property is basically any type of property that isn’t physically attached to a building, which includes equipment for your office.
Some qualifying equipment that can receive a full deduction under Section 179 include:
- Copiers and multifunction printers like Canon and Sharp
- Office equipment
- Postage meters like the FP PostBase econ
- Mailroom equipment, including FP Mailing Solutions
- Large format printers
- And more
Updates to Section 179 Deductions for Businesses
In the past, section 179 was used mainly to write off the purchase of qualifying vehicles; however, the code has since been updated to reduce the limits on business vehicles and, instead, focus more on the lease and purchase of business personal property (by the way, if you’re wondering if you should lease or buy your next photocopier or multifunction printer, check out this article). However, the deduction can still be used on vehicles, provided they are not likely to be used more than a minimal amount for personal use for the full deduction.
The deduction amount for business property also increased from the $500,000 limit of years ago to $1,000,000 for the year 2021. The phase-out threshold was also increased to $2.5 million from $2,000,000.
Over the years, as higher deduction limits expire, Congress has been known to increase them again. Section 179 itself also continues to evolve through the years due to the different stimulus and tax acts, so be sure to check for changes often.
What Businesses Qualify for It, the Limits, and How to Apply for the Deduction
What Businesses Qualify for Section 179?
Just about any U.S. business that purchases, leases, or finances new or used business personal equipment during the 2021 tax year can apply for the deduction, provided the cost is under $3,500,000, which is the amount where the entire deduction phases out.
Section 179 Limits
There is a limit to the total amount of equipment purchased or leased, which is $2,500,00 for the year 2021. Once the property amount exceeds $2,500,000, the deduction is gradually reduced on a dollar-per-dollar basis and then phases out completely once property purchases reach $3,500,000.
Applying for the Deduction
Applying for the deduction is simple and can be done in the following few steps:
1. Make A Purchase
First, purchase qualifying property, such as one of Canon or Sharp’s copiers, or other multifunction printers, postage meter, photocopy machine, FP Mailing Equipment, and begin putting it to use during that year, so you are eligible to take the deduction on your tax return to reap the benefits of the savings.
2. Maintain Good Records
You will need to maintain records of all business personal property purchases, including the date of purchase, the date you started using the property, and all costs associated with the purchase, including shipping and installation costs to serve as proof.
3. Take the Deduction on Your Tax Return
When completing your tax return for the year, you simply take the deduction on your return. You can also take the deduction even if you have been granted an extension to file. It also doesn’t matter whether you used qualifying financing to purchase the property, or you paid cash for the property, you are still eligible to take the deduction.
4. Use Form 4562
To apply for the 179 Deduction, you will need to use IRS Form 4562 to report the details required for the deduction. When completing this form, you will need to provide information regarding business property acquired and put into use throughout the tax year.
Most equipment and software, provided it is ready to use software, that your business leases, finances, or purchases will most likely make you eligible for the deduction; however, be sure to read the IRS information thoroughly to ensure that it qualifies.
Next, add up all the eligible items, and then use IRS Form 4562 to take the deduction.
To do so, complete the first section, or part 1, of the form, and then include it with your tax return. The amount of the deduction is the sum of all property costs up to $500,000 per item. However, the total deduction for all property cannot exceed the $2,500,000 maximum.
You also do not have to use the deduction on all qualifying property purchased during the year, unless you choose to. However, when filing any specific year, the property must have been bought or leased and placed into use between January 1st and December 31st of the year for which you are filing your return.
The deduction can also be claimed up to the deadline for filing your taxes for the year you are claiming the deduction, even if you are granted an extension to file.
5. Contact a Tax Professional
Section 179 tax write-offs vary with each business situation, and the tax rules change often, which can make completing Form 4562 confusing for some businesses.
Therefore, if you intend to utilize Section 179, before buying business personal property, consult with a tax professional who can help determine if the purchased property is indeed qualifying equipment. He or she can also walk you through the process of filing the deduction for the best results.
Your tax professional can also advise you of any additional deduction and Bonus depreciation savings that may be available to you.
Since Section 179 was designed with businesses in mind, just about any business personal property that your company purchases, finances, or leases qualifies for the deduction.
In the meantime, all businesses require equipment to operate, which means they will most likely need to make multiple property purchases throughout the year, in which case, Section 179 helps make investing in your small business more attractive for this tax year. Furthermore, Section 179 is known to change each tax year without notice, so it is important to take advantage of this year’s deduction now.