How can business owners take advantage of financial opportunities in 2022 to ensure stability and growth for the future? Let’s put it simply: this tax code contains a little gem to small businesses and it’s called Section 179.
Many business owners may think this tax code is complicated or somehow they can’t take advantage of it. Here at Burkett Restaurant and Supplies, we hope this post makes it simple and easy for anyone to understand Section 179.*
*Keep in mind, we at Burkett are not tax professionals. We encourage you to consult your tax advisor about what is best for your business.
What is Section 179?
In the simplest of terms, Section 179 is a section of the IRS tax code that allows a business to purchase a piece of qualified equipment and/or software and deduct the full purchase from their gross income.
As one of the government incentives for small businesses included in the Congressional Tax Bills, Section 179 encourages businesses to buy equipment and invest in themselves.
The maximum deduction business owners can take varies from year-to-year. For 2022, the maximum deduction you can elect for is $1,080,000.
This tax incentive is particularly beneficial for organizations with commercial kitchens, such as restaurants and schools, who likely saw a 10% increase in their food costs in 2022.
How does Section 179 work?
Previously, your business might have typically written off an equipment purchase over time through depreciation. For example, maybe your business bought a piece of new restaurant equipment for $50,000 and you wrote off $10,000 a year for five years. Under the normal depreciation rules, business owners would only receive a fraction of the cost in deductions each year over the useful life.
With the help of Section 179, business owners can now write off the entire equipment purchase for the year they buy it. Now in 2022, if you purchased that $50,000 piece of equipment, you can deduct that from your net income the first year you own it. Assuming the tax bracket is 35%, your savings would be $17,500 on that $50,000 purchase.
It is important to note that you must elect on your taxes to use this code as it is not automatic and you must be profitable to qualify.
Ultimately, this deduction has allowed businesses to buy equipment right now rather than waiting, therefore stimulating the economy. For further information on how to depreciate property, visit the IRS website.
Section 179 Limits
There are limitations on both the overall amount of write-offs and the total quantity of equipment acquired under this tax deduction.
In 2022, the total you can write off $1,080,000. The IRS states that this limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,700,000.
As a result of this limit, this tax code is a true deduction for small and medium businesses.
Qualifying for Section 179
In reality, all businesses that purchase, finance, and/or lease new or used commercial kitchen equipment for their business during the tax year 2022 should be eligible for this tax deduction. This applies as long as their purchase is less than the $2.70 million limits.
It takes more than just the commercial kitchen equipment to run your business, and Section 179 applies to the majority of physical items purchased and used by American businesses, including software, vehicles and more. The equipment, software, or other applicable items must be purchased and already in use by December 31st of the tax year. The items purchased must be used for business purposes more than 50% of the time to qualify for this Section 179 deduction as well.
Section 179 vs. Bonus Depreciation
Many business owners at the end of the year ask, “Should I take the bonus depreciation or Section 179?”. To simply answer that question, it is based on the amount you are spending on new equipment and the size of your business.
Bonus depreciation is a tax incentive that allows business owners to report a larger chunk of depreciation in the year the asset was purchased and in-service (restrictions apply and not all assets are eligible). Since there is no dollar limit on this tax deduction, it is advantageous for very large businesses which spend more than the Section 179 spending cap on new capital equipment. In 2022, the bonus depreciation is being offered at 100%. Full bonus depreciation goes down by 20% each year for property placed in service between Dec. 31, 2022, and Jan. 1, 2027.
It is important to note that in 2022, the tax code has changed with bonus depreciation. Prior to 2021, bonus depreciation has only covered new equipment. Now with the changes, this tax deduction includes used equipment as well. Also important to note: if your business has a net loss, you can still qualify to deduct some of the cost of the new equipment and carry forward the loss.
What is Bonus Depreciation?
According to the IRS, Bonus Depreciation gives business taxpayers the ability to deduct additional depreciation for the cost of qualifying business equipment beyond normal depreciation allowances. The rules allow Bonus Depreciation to 100 percent for all qualified purchases made between September 27, 2017 and January 1, 2023. By giving business owners an incentive to purchase equipment now, they can began making a return on their investment without the added depreciation cost.
What to do with the savings
With rising costs of equipment and longer than average lead times, buying for both profitability and longevity is crucial as we move toward 2023.
Taking advantage of the tax deductions you are eligible for can help grow your business. Financing your equipment allows your business to have cash on hand in case of any emergency. The write-offs in the taxes can exceed profits, which can allow you the ability to reinvest more into your business.
Again, if you have any questions on how you can apply this to your business, please consult your tax professional.
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