October is the busiest production month of the year. Most fabricators are busy cranking out doors and windows at peak levels for the year. After Thanksgiving, we will see a considerable slowdown as we coast to the end of the year. This is the time of the year when fabricators start looking at installing new or preowned equipment to get ready for the new production year. Therefore, it is time for a reminder about the Section 179 Tax Deduction.
Prior to the passage of the latest tax code that offers Section 179, businesses could write off or depreciate equipment over the course of many years, the length of which was determined by the projected usefulness or lifespan of the equipment. For example, if you bought a vinyl welder costing $100,000 that was projected to last 10 years, then you could depreciate the welder over 10 years in a straight-line fashion, earning a $10,000 deduction each year for 10 years. Alternatively, you could choose to use an accelerated depreciation method, such as Double Declining Balance (DDB) or the Sum of the Year’s Digits (SYD) method. These accelerated methods consider the fact that many types of machinery will be used more heavily in the first few years of service and less often as the machinery ages and is running less efficiently. By using one of these accelerated depreciation methods, a company could write off a bigger portion of the cost of equipment in the first few years, effectively lowering the company’s net income and reducing its tax liability. After all, a dollar saved today is worth more than a dollar saved five or 10 years from now.
So, the value of a present-day dollar saved is precisely what makes a Section 179 Tax Deduction so attractive. It allows small businesses to write off the entire purchase price of qualifying equipment for the current tax year. This makes a huge difference for many companies when it comes to deciding on buying new or even pre-owned equipment today, as opposed to delaying the decision while trying to stretch the lifespan of your current equipment. For most small businesses, the entire cost of qualifying equipment can be written off on the 2024 tax return (up to $1,220,000). Section 179 is a program aimed at helping small companies and businesses spending more than $4.27 million per year. Check out the details here.
Two major action items are relevant when it comes time to cash in on section 179 tax savings. Number one, if you have a new or used machine coming in late in the year, make sure that you hook it up and put it into production before the end of the year. This is one major stipulation of Section 179 eligibility. Software is also included, so if you purchase a new software system, make sure that you have it up and running by December 31. The second major action item is to simply decide on tangible items sooner as opposed to next year. Purchase machinery, vehicles or software by year end so you can reap the benefits of the tax savings, which effectively lowers the actual cost of each item.
For example, using the Section 179 Tax Savings Calculator, you can see that a $100,000 purchase of a new or used machine completed by year end and put into service will save you $35,000 on your taxes (assuming a 35% corporate tax rate) making the effective cost of this equipment only $65,000.
One thing is for certain, given the current rate of inflation and accounting for the time value of money, $35,000 remaining in your bank account come April 15 is worth way more than $35,000 in savings spread out over five or 10 years. That’s the magic of Section 179 tax savings!