How Solution Providers Can Help Small Businesses Save Big At Tax Time

Well, it’s that time of year again.

There’s a distinct chill in the air, and thoughts turn to raking leaves, Thanksgiving recipes, sugarplum dreams, and…IRS tax codes?

Yes! In the midst of the holiday season, your SMB customers are desperate to come up with ways to reduce their 2020 tax burden. There are multiple ways in which to do this – contributing to IRA and HSA accounts, carryovers, accountable plans, and more. Many owners elect to invest in their business by making strategic equipment purchases and taking a deduction on the purchase price.

The Tax Cuts and Jobs Act of 2017 made some major changes to the IRS tax code, namely to bonus depreciation and enhanced Section 179 expensing.

Section 179 is an immediate expense deduction that business owners can take when purchasing depreciable equipment. Bonus depreciation for 2020 is at 100%, which means owners can deduct the full amount of the purchase price from their taxable income. Taking this deduction allows the business to get an instant tax break, rather than capitalizing and then depreciating an asset over a longer period of time.

There are some stipulations your customers should be aware of. First, the equipment must be placed and put into service by midnight on December 31st in order to qualify for the 2020 tax year. Second, the equipment must be used for business purposes more than 50% of the time. Third, the total dollar-for-dollar amount that can be written off is capped at $1,000,000 for 2020, providing the opportunity for substantial tax savings. Section 179 really was specifically created with the small business owner in mind, encouraging them to invest in their businesses by purchasing new equipment such as vehicles, office machinery and IT equipment. With bonus depreciation now at 100%, tax reform has made these end-of-year purchases all the more attractive for owners.

While that’s all well and good, it does beg the question – is there a way your customers can take advantage of this valuable program while being mindful of cash flow?

Absolutely.

Business owners can take full advantage of Section 179 when leveraging certain types of financing, namely conditional sale ($1 out) and Equipment Finance Agreements (EFA). Small businesses that are carefully managing cash flow are able to minimize out-of-pocket expenditures and still benefit from Section 179. That’s right – your customers can acquire and write-off up to $1,000,000 worth of equipment for 2020, without actually spending that amount this year. Now, I’m not a tax preparer, but it doesn’t take a CPA to realize that the ability to take a dollar-for-dollar deduction this year with the ability to make smaller payments over time is a win/win situation.

Section 179 is simple to use and bonus depreciation can greatly help your customer’s bottom line. As it is a use-it-or-lose-it benefit, there really is no better time than now to have a conversation with your customers on their technology roadmap and how you can help them take advantage of this valuable benefit in the coming weeks.

*Companies should consult with a tax adviser to determine the best depreciation methods for their specific situation.