Hoping to expense business IT purchases this year? Thanks to some very liberal tax laws written to encourage investment in personal tangible equipment – it’s possible. Many businesses will be able to expense business IT purchases (and other assets) before the end of the tax year. However, for businesses using the accrual method of accounting, timing is critical. To expense a business purchase – you must follow the rules. To write off the purchase as a business expense, the purchase must be completed and equipment placed in service before the company’s year-end.
There are a number of ways to deduct IT costs. Therefore, the best method should be based upon the need for a current-year deduction. However, one must also consider that the deductions may be more beneficial in a future year. So careful planning is necessary to receive the full benefits from an expensed business purchase.
6 ways to expense business IT purchases
Depreciate
The most conservative method of writing off an investment is to depreciate the equipment over the recovery period (useful life). A “useful life” is either 5 or 7 years (as designated by the IRS). And the length of time depends on the individual item. Generally, computers, copiers, and other similar items are depreciated over 5 years, while office fixtures, furniture, and other equipment are depreciated over 7 years.
Material & Supply Expensing
Capitalization and repair regulations may come into play with what is called material or supply expensing. If an item costs $200 or less, it is expensed rather than depreciated.
Items that cost under $200 are expensed and not depreciated.
De Minimis Safe Harbor Expensing
Another part of the capitalization and repair regulations allows businesses to expense up to $2,500 of equipment. This amount is $5,000 if the business has an applicable financial statement. The limits of De Minimis Safe Harbor can be applied per item, or per invoice. This flexibility provides a significant amount of latitude in expensing.
Routine Maintenance
Maintenance purchases can be expensed if it keeps the property in operating condition. Especially if the business expects to perform the maintenance twice during the property’s class life (different than depreciable life). The class life for information systems and computers is 6 years.
Bonus Depreciation
Bonus deprecation allows a business to deduct 100% of the cost of new tangible property. There is a recovery period of 20 years or less if it is placed in service during 2020. 100% bonus depreciation will begin to phase out after 2022.
Section 179 to Expense Business IT Purchases
Sec. 179 of the Internal Revenue Code allows full expensing of IT equipment purchases. The Sec. 179 deduction allows companies to expense up to $1,050,000 in 2021. ($525,000 for a married taxpayer filing separate). In contrast, this is up from $1,040,000 (and $520,000) for purchases in 2020 of personal tangible equipment. The stated amounts are for federal purposes, (state limits may be different). There is an aggregate investment limit of $2,620,000 (up from 2,590,000 in 2020). Thus if the company makes investments into property eligible for Sec. 179 expensing in excess of $2,620,000 in 2021, the amount allowed to be expensed under Sec 179 is reduced by one dollar for each dollar the investment limit is exceeded. Amounts are inflation-adjusted annually.
Important to realize that there are negative factors to using Sec. 179 expensing. If the item is disposed of before the end of its recovery period, the expense deduction is recaptured. This is to the extent that it exceeds the otherwise allowable depreciation deduction for the period. The recaptured amount is added to the business’s income for the disposition year. For very large companies, the use of Sec. 179 is restricted because of the annual limit.
Blended Methods to Expense Business IT Purchases
It is possible to use a combination of depreciation, bonus depreciation, and Sec. 179 expensing to achieve just about any result for small businesses.
Please call if you have questions. We can answer questions about acquiring business assets, including IT equipment, and how it may impact your business’s bottom line.
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