2021 has been a year of resurgence and resiliency for our businesses and country. After a tough 2020, this year has still provided numerous challenges for many industries. We are still experiencing a global pandemic causing supply shortages, longer lead times, higher costs, and labor shortages. It leaves many people with a lot of unknowns for the coming years.
How can we invest in our business in this economy to ensure financial stability for the following years to come? Let’s put it simply: the tax code contains a little gem to small businesses called Section 179.
Most 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 by any means. 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 encouraging businesses to buy equipment and invest in themselves. This is one of the few government incentives for small businesses which have been included in many of the recent stimulus acts and Congressional Tax Bills.
Essentially this allows for the business to purchase a piece of qualified equipment and/or software and deduct the full purchase from their gross income. For 2021, the maximum deduction you can elect for is $1,050,000.00.
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 machine 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, 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.
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 2021, the total you can write off is $1,050,000.00, but this section limits the total amount of equipment purchased to $2,620,000.00. This deduction begins to phase out on a dollar-for-dollar basis after the initial $2.62 million is reached. Thus, the entire deduction goes away after $3,670,000.00 in purchases.
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 equipment for their business during the tax year of 2021 should be eligible for this tax deduction. This applies as long as their purchase is less than the $3.67 million limits.
In addition, Section 179 applies to the majority of physical items purchased and used by American businesses, including “off the shelf” software, business use cars, equipment, and other commodities. 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 197 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 2021, the bonus depreciation is being offered at 100%.
It is important to note that in 2021, the tax code has changed with bonus depreciation. In prior years, 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.
This deduction does automatically apply when filing taxes but you can opt-out of the use of it. When applying for these write-offs, Section 179 is generally taken first then Bonus Depreciation. This only changes when the business has no taxable profit due to the unprofitable business being allowed to carry the loss forward for future years.
What to do with the savings
2021 has been another challenging year for any size business. With rising costs of equipment and longer than average lead times, buying for both profitability and longevity is crucial.
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.
If you are ready to purchase, lease or finance your foodservice equipment, give us a call, email, or check our website out at Burkett.com for web live chat to talk to a live salesperson. If you are local to the Toledo area, check out our showroom in Perrysburg at 28740 Glenwood Rd!