Updated: Dec 1, 2020
Your next manufacturing software purchase could cost less than you realize, due to end of year Section 179 deductions.
Assuming a 35% tax bracket, a $50,000 qualified purchase could save you $17,500 in federal taxes.
What is the IRS Section 179 Deduction?
IRS Section 179 is a tax incentive intended to allow small and medium-sized businesses deduct the full cost of qualified equipment and software purchases in the same year those assets are placed into service.
"That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income." - Section 179 Official Website
How does Section 179 save manufacturers money?
Traditionally, when manufacturers made large equipment or software purchases, they would have to depreciate the cost of that asset over many years.
Section 179's expensing method instead allows a manufacturer to write-off the entire cost of qualified equipment and software purchases in the same year they are placed into service.
Take, for example, a manufacturer who just bought a new CNC router for $50,000. Under traditional scheduled depreciation, they would have to spread out the depreciated cost over the lifespan of the equipment - deducting $10,000 per year over the next 5 years, for instance. Using the Section 179 expensing method, a manufacturer can instead deduct the full $50,000 in the router's first year of service.
So, assuming a 35% tax bracket, a $50,000 qualified purchase could save you $17,500 in federal taxes. Use this free Section 179 Calculator to estimate your potential tax savings.
Are there any limits on Section 179 Deductions?
Section 179 Deductions are typically only available for small and medium-sized manufacturers spending under a certain threshold.
This year, however, the IRS is offering a 100% Bonus Depreciation, allowing manufacturers to tax deduct the full purchase price of qualifying equipment and software purchases, no matter how large!
Whether you are a local manufacturer or a large enterprise, every penny spent towards qualified new or used equipment and software in 2020 can be deducted from your taxable income!
Does manufacturing software qualify for Section 179?
There are a few basic requirements to ensure your software purchase is eligible for an IRS §179 Deduction. In general, the software must be used exclusively for business and have a useable lifespan of more than a year. The software must also be generally available to the public, and therefore not exclusively developed or heavily-modified for your specific company.
This means "in-house" or custom-developed software is not likely to be eligible, while commercially available manufacturing solutions (such as Excellerant) do qualify for Section 179 deductions.
There is still time to save on qualified manufacturing software.
Section 179 Deductions are a "use-it or lose-it" write-off, so don't wait to implement your new manufacturing software purchase! Your new equipment or software must be placed into service before the end of the year to qualify.
Now is the perfect time to invest in IIoT and CNC machine monitoring software. Even as the pandemic rages, Industry 4.0 solutions have proven to be a great way to reduce COVID's impact on manufacturers.
Section 179 offers a great opportunity to deduct the full cost of this software investment from your 2020 gross income.