Introduction
For small businesses, investing in growth can be difficult. Cash flow is often limited, meaning that business owners are forced to carefully consider where every dollar is spent.
But what if business owners had an incentive to invest in their IT infrastructure while lowering their tax burden? Fortunately, that’s exactly what Section 179 of the U.S. tax code does. Section 179 allows businesses to deduct the full purchase price of equipment such as IT infrastructure from their taxable income for the year in which the assets were purchased, making it a powerful investment incentive.
In today’s post, we’ll cover what Section 179 is, how it applies to small businesses, and how businesses can take advantage of it for certain IT expenses.
In This Article
What is Section 179?
Section 179 of the U.S. IRS tax code provides businesses with a means to claim the entire deduction of qualifying assets upfront rather than writing off depreciation over the lifetime of the asset. This can provide businesses with an immediate financial benefit due to the reduction of taxable income.
What Are the Deduction Limits for 2024?
The Section 179 deduction limits for 2024 are as follows:
- Deduction Limit: According to section179.org, the 2024 deduction limit for new and used equipment, as well as off-the-shelf software, is $1,220,000. Keep in mind that the equipment or software “must be financed or purchased and put into service” during the 2024 calendar year.
- Spending Cap: There is a spending cap on 2024 equipment purchases of $3,050,000. If total qualifying purchases exceed this amount, the deduction starts to decrease. It’s important to note that businesses that spend more than $4,270,000 in 2024 do not qualify for the Section 179 deduction, meaning that this deduction is meant for small and medium businesses.
- Bonus Depreciation: There is also Bonus Depreciation of 60% for 2024 purchases, which is available for both new and used equipment and is generally taken after the spending cap is reached. See section179.org for more information.
Who Can Benefit from Section 179?
As noted in the previous section, small and medium businesses stand to benefit most from Section 179 since large businesses typically spend significantly more money on assets. As a result, the amount of large businesses’ investments that qualify for Section 179 as a percentage of their overall investment is much lower. The deduction also is most beneficial for businesses that purchase their assets rather than lease them.
Whether you’re a manufacturer or construction company buying a piece of equipment or a financial company upgrading a core software system, Section 179 can provide immediate relief for these purchases. It can also provide a strong incentive if, for example, a business needs to replace the laptops for numerous employees since computers age so quickly.
What IT Expenses Qualify for a Section 179 Deduction?
Technology plays a critical role in the success of small businesses. While Section 179 can make IT infrastructure investment more affordable, not all equipment and software qualify. Some of the most common IT assets that can be deducted under Section 179 are:
- Workstations: Laptops, desktop computers, and certain peripherals such as monitors.
- Networking Equipment: Servers, routers, switches, firewalls, and more.
- Business Software: Off-the-shelf computer software, such as Customer Relationship Management (CRM) systems, accounting software, inventory management systems, and cybersecurity solutions. Note that software that is custom made or modified for a specific company does not qualify.
- Data Storage Solutions: Cloud storage solutions (such as NAS devices), external hard drives, and data centers.
Because these assets are deductible, small businesses can more easily scale operations, improve productivity, and maintain a strong IT security posture.
How Does the Section 179 Deduction Work?
Applying the Section 179 deduction is pretty straightforward:
- Purchase qualifying equipment or software: Ensure that the assets are eligible and that they are purchased in the year in which the deduction will be claimed.
- Use the assets for business purposes: To qualify, the assets must be used for business purposes at least 50% of the time.
- Deduct the asset costs: When a business files its taxes, it can deduct up to the set limit from its taxable income for that tax year.
Here’s an example: A manufacturer purchases $50,000 worth of IT equipment and off-the-shelf software in 2024. Since this amount does not exceed the 2024 Section 179 deduction limit, the manufacturer can claim the entire $50,000 amount for 2024. For the sake of simple math, if the tax rate is 20%, this deduction would reduce the manufacturer’s taxes by $10,000. It is now easy to see just how powerful Section 179 can be.
Why Now is the Time for Small Businesses to Invest in IT Infrastructure
Technology is crucial for small businesses. It can secure a company’s environment and boost productivity, or it can bog down operations and expose it to security threats. Unfortunately, large capital expenditures can be challenging for small businesses, which can cause business owners to avoid making necessary investments.
With the quickly evolving technology landscape, it is becoming harder and harder to stay competitive and secure. Fortunately, Section 179 eases the burden of investing in essential upgrades. Consider taking advantage of this incentive to enjoy the following benefits for your small business.
- Enhance cybersecurity and compliance by investing in Managed Detection and Response (MDR) solutions, Multi-Factor Authentication (MFA), and network firewalls.
- Boost productivity by replacing outdated laptops and desktops that can keep up with the latest software and operating system demands.
- Optimize operational efficiency by investing in CRM systems, accounting and quoting software, and other off-the-shelf software that saves time on repetitive or time-consuming tasks.
- Support Flexible Work Models such as Work From Home by purchasing or upgrading VoIP phone systems, secure VPN systems, laptops, webcams, and Microsoft Teams. Such investments can also support technicians who work in the field.
- Future Proof Your Small Business by investing in AI and automation tools that can further boost your company’s productivity and security, such as ExcalTech’s email spam filtering, which uses sophisticated machine learning to detect and filter spam that can distract staff and carry malware.
Conclusion
Section 179 is a valuable tool that small businesses can use to provide immediate tax savings and ease the burden of investing in their IT infrastructure. This post is meant to help small business owners understand what Section 179 is and how it can benefit their business. However, ExcalTech strongly recommends that business owners consult a tax professional to ensure that they take full advantage of Section 179 while ensuring full compliance with the rules set forth by the IRS.
How ExcalTech Can Help
ExcalTech provides managed IT services along with professional consulting and tailored IT solutions for small businesses across multiple industries in the Midwest and South Florida markets. Whether your business is looking to strengthen its cybersecurity or upgrade its IT infrastructure, our team has the expertise to be your trusted IT partner and guide you through your IT investments.
Contact us today to learn how we can help your business make the IT investments it needs in 2024 while taking advantage of Section 179.
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