February 17, 2021

    How to Take Section 179 Tax Deductions on Your Software Purchase

    If you invest in software (even software as a service) this year or are thinking about it, you’ve probably heard that your purchase may qualify for the Section 179 tax deduction.

    But what does this deduction entail? And how can you determine if your business meets the requirements?

    The tax deduction is quite favorable toward software and technology investments in 2022. With the constraints many businesses have experienced recently, Cloud capabilities are more important than ever to business continuity and growth.

    Here, we’ll outline the basics of Section 179 to help you determine if your purchase qualifies – or if you should take the leap on an investment before the year is out.

    What is Section 179?

    According to Section179.org:

    “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. If you buy (or lease) a piece of qualifying equipment, you can deduct the full price from your gross income.”

    This tax code has been around for a while, and there’s a chance you’ve deducted a purchase under Section 179 before. However, details and requirements for deductions have changed over time.

    This deduction is meant to help small and midsized businesses make valuable, business-building purchases. Organizations can write off the full purchase in the same year if it qualifies, rather than writing the purchase off in increments over several years.

    Considering the value of this deduction and the rapidly increasing demand for digital and Cloud capabilities, it may be a good time to pursue a software purchase you’ve been putting off.

    Section 179 Specifications for the 2022 Tax Year

    To qualify, the financing or purchase and actual implementation of equipment or software must occur within the 2022 tax year. You must provide specific details of the purchase on IRS Form 4562 to claim the Section 179 deduction.

    The deduction and bonus depreciation can be used for new equipment, used equipment and qualifying software.

    • Deduction limit: $1,080,000
    • Spending cap: $2,700,000
    • Bonus depreciation: 100%

    Details on Section 179 and Software Purchases

    Businesses can deduct “off-the-shelf” computer software purchases. “Off-the-shelf” means the software can be purchased by the general public and isn’t custom designed. The deduction also applies to various solutions, such as software as a service (SaaS), enterprise resource planning (ERP) and customer relationship management (CRM). Solutions tailored to specific functions (e.g., human resources, healthcare, legal and accounting), may also qualify for the deduction.

    Custom software with code written specifically for your business will not qualify for the deduction. Software that has significant modifications also will not qualify.

    The code also lists requirements for the software’s expected life and use.

    • Businesses use it more than half of the time for tasks that generate income.
    • The software must have a “determinable useful life” so it qualifies as depreciable.
    • The life of their purchase should extend beyond one year.

    There are additional requirements related to financing, so get in touch with your CPA or tax advisor to ensure your purchase qualifies.

    What Section 179 Means for You

    • If you buy or finance software in 2022 and meet the requirements, you may be able to deduct up to $1,080,000 of the purchase from your gross income.
    • If your purchase exceeds this limit, you can use the 100 percent bonus depreciation for your overage.
    • If you finance, you can deduct the entire purchase price even if you don’t pay the entire purchase amount in 2022.

    Feel free to reach out directly to our team of experts to learn more about this offer.

    NOTE: Remember to consult your CPA or tax advisor regarding your purchase.

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