Machine shops and manufacturing facilities play a vital role in our modern industrial landscape, providing precision-engineered components for a wide range of industries. However, as with any business, manufacturing business management comes with its fair share of challenges, one of which is managing the ever-present tax burden. Learning how to reduce your small business tax bill can help you reduce overall costs and increase your competitiveness. Fortunately, the Section 179 tax provision can help small businesses reduce their tax liabilities. In this article, we'll explore how Section 179 can benefit businesses like yours.
What is Section 179?
Section 179 is a tax code provision that allows businesses to deduct the full purchase price of qualifying equipment and software bought or financed during the tax year. In simple terms, it means that instead of spreading the cost of equipment over several years through depreciation, you can deduct the entire expense in the year you acquire it. For example, if your company spent $30,000 on a machine, it would typically write off $6,000 per year for five years. However, Section 179 allows your business to write off the entire purchase price of qualifying equipment in the current tax year. Instead of waiting years to recover the cost of your equipment through depreciation, you can reap the benefits from day one. For tax years beginning in 2023, the maximum Section 179 expense deduction is $1,160,000. This limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $2,890,000.*
Section 179 Eligibility Criteria
To qualify for a Section 179 deduction, the equipment must be purchased or financed and put into service in the same tax year (meaning eligible equipment must be purchased AND put into service by midnight on December 31st of the tax year). Additionally, the equipment must be used predominantly for business purposes. While this means you can't write off the cost of personal use items, it covers a wide range of industrial machinery and equipment typically used in machine shops and manufacturing facilities, including drill presses, lathes, milling machines, and more.
The Benefits Of Section 179
Investing in capital expenditures, such as computers, office equipment, and machinery, is crucial for enhancing efficiency and promoting growth in your shop. As the year comes to a close, it is an opportune time to evaluate the advantages and disadvantages of acquiring new equipment and assess your business needs, goals, and available resources. By writing off the full cost of eligible machinery and equipment, you can potentially save a significant amount of money. The tax savings can then be reinvested back into your business, allowing you to upgrade equipment, expand operations, or even increase your team's skill set. For machine shops and manufacturing facilities specifically, investing in new machinery offers several benefits:
Increased efficiency and productivity: By investing in machinery that can complete tasks faster, reduce manual or repetitive work, or achieve higher quality finishes, you can improve efficiency, productivity rates, and cost savings by eliminating or reducing post-production tasks.
Increased capabilities and competitiveness: New machinery can expand your capacity, enabling you to take on more jobs or complete production runs in less time.
Improved safety: New machinery generally comes with enhanced safety features. Older equipment, regardless of maintenance efforts, can pose safety risks as its mechanisms wear down and depreciate over time.
Increased autonomy and ownership: Purchasing machinery instead of leasing it allows you to make necessary modifications without relying on a leasing company. Additionally, purchasing your machinery enables you to fully leverage tax incentives.
A boost in cash flow: The immediate tax savings provided by Section 179 allows to immediately recover the cost of your equipment versus waiting years through depreciation deductions. This can provide a welcome boost to your cash flow, allowing you to invest in other critical areas of your business without having to worry about a hefty tax bill.
*NOTE: The IRS imposes restrictions on what can be expensed with a Section 179 deduction, as well as the maximum deduction amount. The most up-to-date Section 179 information is available on the IRS website. If you are considering taking a Section 179 deduction, it is advisable to CONSULT YOUR ACCOUNTANT OR TAX PROFESSIONAL.
Conclusion
While taxes may not be the most exciting topic, understanding how to reduce your tax liabilities can have a profound impact on your business' financial health. Section 179 presents a fantastic opportunity for machine shop and manufacturing facility owners to make the most of their equipment purchases by deducting the full cost upfront. By taking advantage of this hidden gem in the tax code, you can save money, improve cash flow, and continue to grow your business.
The IRS restricts what can qualify as a section 179 deduction and can adjust section 179 limits annually, this article refers to 2024 tax year details. CONSULT AN ACCOUNTANT OR TAX PROFESSIONAL FOR THE MOST CURRENT SECTION 179 INFORMATION.
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