Updated: Nov 7, 2020
Regardless of your line of work, all businesses have one common goal in mind: to generate revenue. Of course, we all want to make a difference in the world and have satisfaction from hard work. However, if you're not earning more than your spending, you need to make some changes. While large black numbers at the end of the year put a smile on your face, the tax bill that comes along with them usually wipes it right off. Thankfully, there are ways around giving up all of your hard-earned profits to Uncle Sam. Relief can come in the form of section 179 deductions. But what are these and how can you legally use them to write off technology purchases and maximize your company's profits?
In our series of blogs for the month, we will be discussing just that. Before we get too deep into the weeds, know that we're not tax professionals, and these articles are purely informational. If you want specifics as to how Section 179 deductions can work for you, please consult accounting professionals.
Time to find a Write-Off?
Everyone loves to talk about write-offs, though few people actually understand the specifics around them. Basically, a write-off involves reporting a business expense to the IRS to avoid taxation on the money used to pay for it.
Write-offs seem great for a business owner or manager. Though, in practice, you have to be very careful to avoid trouble with the IRS. After all, you can be sure that they will be scrutinizing any revenue they lose. You've probably heard of people who went a little write off crazy in the past now find themselves with 3 square meals a day for free in federal prison!
Can You Write Off Technology Purchases?
How do you know exactly what to write off and how does this apply to technology? Basically, you can categorize business write-offs into six forms:
Business Personal Property
This includes just about anything that could move from your business base. These can range from office supplies (like pens and staplers) to electronics or even heavy equipment like forklifts. If it is relatively easy to move from one location to another, then it's considered business personal property. Often technology upgrades will fall into this category, so you can write off technology purchases. They could include new desktops, laptops, servers, or converting everything to the cloud.
This category covers larger objects that you cannot easily move. For example, you can think about larger printers, medical diagnostic machinery, etc. If not covered under business personal property, you can write off technology purchases, here.
This is really a category for anything else that produces for your company. Examples in this category might include industrial machinery that you couldn't just put on the back of a pickup truck. These would usually include the sorts of large machines that you would find in a factory or business like that.
This is a category that could get someone in trouble quickly. A vehicle, such as a car or truck, purchased by the company and only used for company purposes at any given time falls into this category. Sometimes, a vehicle is used for a combination of work or personal purposes. If that's the case, report the percentage of the time the vehicle is used for business versus personal trips.
This includes any buildings or land that your company owns and is used exclusively for business purposes.
By definition, capital improvement is a structural change or restoration of property that will enhance its value, prolong its useful life, or adapt it to new uses. This does not include any sort of work you do to a property. For instance, the addition of an air conditioner or furnace could be considered capital improvement while doing interior decoration is not. New cable runs to enhance Internet access to your building may also fall into this category.
Tax Write-offs Are Income!
For many of us, tax returns are a bonus. Perhaps if you get one, you take that money to go by a new television or go on vacation. However you use it, most of us consider tax returns a little bonus, not something in our personal budgets.
This should not be the case with businesses. Section 179 deductions are not bonuses, but rather strategic ways of not paying too much in tax. One of the reasons that good tax people are worth their weight in gold is they save your company from paying too much in taxes.
A good company will factor in write-offs when making their budgets and factoring quarterly and yearly profits. For some companies, particularly small companies, those write-offs might be a large portion, if not the entirety, of their profits for the year!
Write off Technology Purchases to Plan for the Future
While many write-offs are incidental or just factoring in day to day business expenses, planning well can make a huge difference in future projects. For example, if you're in the black more than you anticipated this year, take the opportunity to refresh your technology, consider moving to the cloud, implementing virtual office space, or making server upgrades. By doing something like this, you can make sure that you are benefitting your business while still turning a profit.
The IRS put section 179 in the tax code for the purpose of letting businesses do business without punishing them to death with taxes. They know that if there is an incentive for companies to spend, it will work out well for everybody in the end. So, don't be afraid to make investments before this crazy year comes to an end. If you need help to strategize your next project, just reach out to us.