When it comes to business expenses, one of the most valuable tax deductions is Section 179. This deduction allows businesses to deduct the full purchase price of qualifying equipment and software from their gross income. However, determining what qualifies for Section 179 can be tricky, especially when it comes to computer software.
What is Section 179?
Section 179 is an IRS tax code that allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. This deduction was created to encourage small and medium-sized businesses to invest in new equipment and technology by providing them with a significant tax break.
What qualifies for Section 179?
Qualifying equipment and software must be purchased and placed in service during the tax year. The following types of property typically qualify for Section 179:
- Machinery and equipment
- Furniture and fixtures
- Computer software
- Off-the-shelf computer software
- Qualified real property (such as certain leasehold improvements, restaurant property, and retail improvements)
Can you Section 179 computer software?
Yes, computer software qualifies for Section 179 if it meets certain criteria. To qualify for this deduction, the software must meet the following requirements:
- The software must be used in your business or income-producing activity.
- The software must have a determinable useful life of more than one year.
- The software must not be custom-designed or developed by the taxpayer.
How to claim Section 179 for computer software
If you’ve purchased qualifying computer software during the tax year, here are the steps to follow to claim your deduction:
Step 1: Determine if your software qualifies for Section 179
As mentioned earlier, to qualify for Section 179, your computer software must meet certain criteria. If you’re unsure whether your software qualifies, consult with a tax professional.
Step 2: Calculate your deduction
Calculate the total cost of the software you purchased and determine the percentage of business use. You can deduct up to $1,050,000 in total equipment and software purchases in 2021, so make sure you don’t exceed this limit.
Step 3: Fill out IRS Form 4562
Complete IRS Form 4562, which is used to report depreciation and amortization expenses for assets that qualify for Section 179. Be sure to include all relevant information about your computer software purchase on this form.
Step 4: File your tax return
Include Form 4562 with your tax return when you file. Make sure to double-check all calculations and information before submitting your return.
Section 179 is a valuable tax deduction that can help businesses save money on their taxes. Computer software can qualify for this deduction if it meets certain criteria. If you’ve purchased qualifying software during the tax year, be sure to consult with a tax professional and follow the steps outlined above to claim your deduction properly.