St. Paul, MN (October 12, 2020)— Manufacturers that purchase, finance, and/or lease new or used business equipment during tax year 2020 should qualify for the Section 179 Deduction (assuming they spend less than $3,500,000). Congress has made the Tax Deduction limit permanent. The limit is $1,000,000 for 2020 and beyond.
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means if you finance a piece of qualifying equipment, you can deduct the full purchase price from your gross income.
To take the deduction for tax year 2020, the equipment must be financed or purchased and put into service between January 1, 2020 and the end of the day on December 31, 2020. This deduction is not automatic and must be elected. To elect to take the deduction, you will need to fill out Part 1 of IRS form 4562.
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Why was Section 179 created?
The Internal Revenue Service (IRS) introduced Section 179 as an incentive to help small businesses and boost the economy. Companies taking advantage of Section 179 deductions are not actually paying less taxes, they are just saving money in the year they made the purchase instead of over five or more years. This encourages small businesses to purchase more while not taking away from the overall tax revenue.
What are the limits on the Section 179 tax deduction?
Under the rules from the Small Business Jobs Act of 2010, Section 179 allowed small businesses to deduct up to $500,000 in one year, but the rules have recently changed to raise the cap to $1 million. To be able to deduct the full amount, you cannot spend more than $2.5 million in that tax year on qualified property. These caps are indexed each year for inflation since they were increased in 2018. In 2020, the amount that can be deducted is $1.04 million and the allowable amount spent is capped at $2.59 million. These limits are what keep this incentive for small and medium-sized businesses.
Section 179 vs. bonus depreciation
Section 179 and bonus depreciation are often confused. They are very similar in that they both allow a business to deduct the cost of qualifying property in the year it was placed into service and they are both used for tangible personal property.
The main difference between bonus depreciation and Section 179 is that bonus depreciation is not limited to a business’ taxable income. In fact, even a business that does not have a taxable profit can take advantage of bonus depreciation. If the cost of the qualifying property is greater than the profit, the business can use bonus depreciation for the amount that is not eligible for the Section 179 deduction.
Using Section 179 for financed or leased equipment
In most cases the full purchase price of the equipment can still be deducted in the first year, even if it is financed or leased. This is a significant benefit to businesses because they can take the full deduction even though they have not fully paid for the equipment. In fact, in many cases the total tax savings can be more than the amount that was actually paid in the first year. The IRS considers a lease to be a financed purchase, so this does not apply to any rented equipment.
For more details on Section 179 and how other depreciation methods work, you can review IRS Publication 946 for instructions. Information on Section 179 begins on Page 15: https://www.section179.org/section_179_deduction/.
Matsuura Machinery USA, Inc., located in St. Paul, MN is the U.S. subsidiary of Matsuura Machinery Corporation in Japan. Since 1935, Matsuura has been the forerunner in designing innovative technology and manufacturing solutions to a variety of industries around the globe. Matsuura Machinery USA, Inc. delivers unmatched excellence in 5-axis, vertical, horizontal, linear motor, multi-tasking CNC machine tools and machines with a powder bed metal AM platform with machining capability. Matsuura Machinery USA, Inc. provides the service, applications and technical field support that have always been the Matsuura standard for business.