Maximize Your Tax Savings With Section 179

Thursday, October 03, 2024

Hands using a calculator and writing on financial documents beside a laptop, illustrating Section 179 tax deduction planning.

Use Section 179 To Invest In Software Services For Your Business

Section 179 is a powerful tool for small-to-medium-sized B2B distributors. It allows you to invest substantially in your business while receiving immediate tax relief. With Section 179, you can deduct up to $1,220,000 in 2024, lowering your taxable income. This means you’ll have more money to invest in your business for future growth.

Not only will this tax deduction help reduce your tax bill, but by upgrading your software, you’ll also improve how your business runs, helping you serve your customers better and outperform your competition.

In this blog, learn about Section 179 and how to take advantage of it.

Purpose for your business

Section 179 allows businesses to deduct the full cost of equipment they buy and start using during the year.

Eligibility

Who can use Section 179? Section 179 is generally intended for small and mid-sized businesses. Large corporations typically don’t benefit from this deduction because it has limits designed to phase out as purchases increase, targeting businesses that invest moderately. The deduction is aimed at businesses making moderate investments, not large corporations, ensuring you get the tax break needed to improve your operations.
What qualifies? Section 179 covers software that is used for business purposes, including:
- Upgraded software
- Machinery and equipment
- Business vehicles with a gross weight above 6,000 pounds
- Computers, and office furniture
- Property used in the business for production, manufacturing, or processing
- Cloud-based software or Software as a Service (SaaS) may qualify based on your tax codes

It’s important to note that the software must be "off-the-shelf" and used more than 50% of the time for business purposes. Custom-developed software typically doesn’t qualify.

Deduction limits for software purchases

2024 deduction limit: $1,220,000
- For 2024, your business can deduct up to $1,220,000 of the cost of qualifying purchases. This increased deduction can cover a significant portion of your software investment.
Phase-out threshold: $4,050,000
- If your total equipment and software purchases exceed $4,050,000 in the tax year, the Section 179 deduction begins to phase out. This ensures that larger corporations don’t benefit as much from Section 179, keeping the focus on small and mid-sized businesses like yours.

Bonus depreciation for large purchases

If your software purchases exceed the Section 179 deduction limit of $1,220,000, you can still take advantage of bonus depreciation, which allows for an 80% deduction on the remaining cost of qualifying assets. Unlike Section 179, bonus depreciation has no phase-out, making it useful if your software investment is substantial.

Why Section 179 is helpful for your business

One of the best things about Section 179 is that you can deduct the full cost of software in the same year you buy and start using it. This means you’ll get immediate tax savings and won’t have to spread the deduction over several years.

For example, if you buy an ecommerce platform in 2024 and it’s fully operational by year-end, you can write off the entire cost in 2024.

Tax advantages for B2B software investments

Immediate cash flow benefits: The ability to deduct the total cost of your purchases in the first year will help reduce your tax liability, giving you a better cash flow situation. This can free up capital for other areas of your business, like inventory or employee growth.
Lower taxes: If you invest $250,000 in software in 2024 and apply the Section 179 deduction, you can reduce your taxable income by that amount, lowering your tax bill significantly.

Important considerations for your business

Business income limitation: The deduction is limited to your business’s annual taxable income. So, if the deduction exceeds your income, you can carry the excess to future years, ensuring you still benefit over time.
State considerations: Some states may not fully follow the federal rules on Section 179, so it’s important to check how your state tax laws align with federal regulations.

Steps for implementing Section 179 tax benefits

DistributionTo take full advantage of Section 179, a dealer must work closely with their accountant to ensure the deduction is properly applied. Here’s a step-by-step guide on how a dealer can implement the tax benefits and what they should communicate to their accountant:

Purchase the software or equipment

Ensure that the software (or any other qualifying equipment) is purchased and put into service before December 31st of the tax year.
Keep detailed records of the purchase, including receipts, invoices, and the date the software is installed and operational.

Communicate intent to use Section 179 to the accountant

The dealer should inform their accountant that they plan to use the Section 179 deduction for their software investment. Here’s what they should tell the accountant:
- What was purchased: Provide a list of the qualifying software and any other equipment that is eligible for Section 179.
- Total cost: Let the accountant know the total purchase price of the software or equipment.
- Date of service: Inform the accountant of the date the software or equipment was put into service (i.e., fully installed and operational for business use).
- Financing or leasing details: If the software was financed or leased, provide details of the financing or lease agreement, as Section 179 also applies to financed or leased items.

Verify section 179 deduction eligibility

Confirm that the software qualifies for Section 179 (i.e., it is off-the-shelf software used for business purposes more than 50% of the time).
Ensure the total investment in software and other equipment stays within the 2024 limits: a deduction limit of $1,220,000 and a phase-out threshold of $4,050,000.

File IRS form 4562

Your accountant must file IRS Form 4562 (Depreciation and Amortization) to claim the Section 179 deduction. The form requires details about the qualifying property, including its cost, service date, and deductible amount.
Discuss whether you should also take advantage of bonus depreciation if your purchase exceeds the Section 179 limit.

Evaluate taxable income

Section 179 deductions are limited by your taxable income for the year, meaning you can’t use the deduction to create a loss. However, any unused deduction can be carried forward to future years.
Work with your accountant to ensure that the deduction is applied to maximize your tax savings for the current and future tax years.

Key points to communicate with the Accountant:

"I’ve invested significantly in ERP/eCommerce software this year, and I’d like to apply the Section 179 deduction to this purchase."
"The software was installed and put into use by [date]. Here’s the documentation of the purchase and implementation."
"I’d like to ensure the entire cost can be deducted this year under Section 179. Can we also look into bonus depreciation if it exceeds the limit?"
"Please help me maximize this deduction against my business income this year. I want to ensure we account for any limitations or carry forward any excess deduction."

By providing clear and organized information, your accountant can accurately calculate the Section 179 deduction and apply it correctly. This will result in a significant tax benefit for your business.

By Lauren Campion

Product & Industry Marketing Manager

Lauren Campion is an accomplished Global Industry and Product Marketing Manager. With in-depth knowledge of ECI products, customers, markets, and competitors, she crafts compelling content for effective market communication. Her overarching goal is to optimize product adoption and profitability for ECI software solutions. Lauren's dedication to customer-centric strategies ensures ECI's continued success in delivering exceptional solutions to businesses worldwide.