The Section 179 tax deduction is one of the most immediate and tangible things most small businesses can use to invest in equipment and lower their tax burden.
The deduction is focused on small and medium-sized businesses because usually the only companies that can use it are ones that spend less than $2 million per year on qualifying business equipment purchases.
There is still time in 2017 to make equipment purchases that qualify for the deduction, but only if you put them into service by December 31.
Purchasing business assets at the very end of the year can be risky because some equipment might not be delivered until January. Making sure the equipment arrives before the end of the year is vital.
To help you get the most out of the tax deduction, here are four ways to prepare yourself:
1. Speak With A Tax Professional
Advanced planning is a big plus when helping maximize Section 179. Meeting with your accountant in the summer or fall to go over your business’s income and tax situation will give you a better idea of where you stand.
A poll conducted by the National Federation of Independent Business (NFIB), found that only 65 percent of small business owners realized they might be eligible for Section 179. That’s why familiarizing yourself with this tax provision is important for small business owners.
Having your profit and loss statement up-to-date is also a must so you can determine your estimated tax liability. After that, you can review opportunities for potential 2017 tax savings.
Even though the Section 179 deduction is capped off at $500,000 per year, the actual limit depends on your business’s taxable income for the year.
For example, if your taxable income is $200,000, you can deduct up to $200,000 for that year. If you’re spending more than your taxable income on qualifying items for Section 179, you can carry over the additional cost for an unlimited number of years and deduct it later.
Use our Section 179 calculator to see how much the deduction can save your company.
2. Consider Financing Equipment
Financing equipment usually qualifies for Section 179. The financing agreement has to be structured so that you’re considered the owner of that property in the eyes of the IRS.
A common example would be a financing agreement that ends with a very low buyout. Writing off equipment with Section 179 can help businesses and medical practices improve their cash flow as well.
You can save on taxes by taking a big deduction in the first year even though you haven’t paid cash up front. Finding the right lender, like Stearns Bank, is a big key to success. Stearns Bank has helped many businesses secure equipment financing with a quick and efficient process.
3. Don’t Buy From Family
Note that business assets acquired from relatives don’t qualify for Section 179.
This means you can’t sell equipment to yourself or acquire it from a family member, such as a spouse, child, parent or sibling.
Section 179 can be used only for new or used property that is purchased for your business — not for leased or rented property received as a gift or inheritance.
You won’t qualify for Section 179 if you are converting personal property to business property, and using it less than 50 percent of the time. Furnaces, air conditioning units, or any property meant for use outside of the United States also doesn’t qualify.
4. Keep Your Records Up To Date
Good recordkeeping is a must when using Section 179. Your records should include exact identification of each piece of equipment, along with how you purchased it, the person you bought it from and when you started using it.
Your accountant will require you to provide all invoices and documentation of the equipment’s delivery.
How Stearns Bank Can Help
If you’re unsure if your equipment qualifies, visit the official Section 179 informational website.
After speaking with your tax professional and following this guide, call Stearns Bank’s Equipment Finance Division at 1-800-247-1922, so we can help you find a financing plan that suits your needs.