If you invested in software (even SaaS) this year or are considering doing so before year-end, 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 you meet the requirements?
The tax deduction is quite favorable toward software and technology investments in 2020. Such investments are key in preparing for and recovering from a recession. And with the constraints many businesses have experienced during the COVID-19 pandemic, Cloud capabilities stand out as more essential to business continuity and growth than ever before.
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, the details and requirements for deductions have changed over time.
This deduction is meant to help small and medium-sized 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, current low interest rates and rapidly increasing demand for digital and Cloud capabilities, this may be a good time to pursue a software purchase you’ve been putting off.
Section 179 Specifications for the 2020 Tax Year
To qualify, the financing or purchase and actual implementation of equipment or software must occur within the 2020 tax year. You must provide specific details of the purchase on 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: $1,040,000
- Spending cap: $2,590,000
- 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, medical, 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 will also not qualify.
The code also lists requirements for the software’s expected life and use.
- Businesses use it over 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 to ensure your purchase qualifies.
What Section 179 Means for You?
- If you buy or finance software in 2020 and meet the requirements, you may be able to deduct up to $1,040,000 of the purchase from your gross income.
- If your purchase exceeds this limit, you can use the 100% bonus deduction for your overage.
- If you finance, you can deduct the entire purchase price even if you don’t pay the entire purchase amount in 2020.
Ready to learn more? Attend a session (Nov. 11, 2020, at 2 p.m. ET) on Section 179 at our FREE Dynamics Enavation Cloud Expo next week. Register here! Feel free to also reach out directly to our team of experts to learn more about this offer.
NOTE: Remember to consult your CPA regarding your purchase.