No doubt, many contractors are busy wrapping up year-end construction projects. With a robust economy fueling record-breaking backlogs, it may seem like late December is a perfect time to catch your breath before you ring in 2019.
Not so fast! Before you pop open your favorite adult beverage, don’t forget that December is also a great month to make year-end purchases that are tax deductible. While construction workers can deduct everything from safety boots to mileage to the cost of association dues, small-to-medium-size construction businesses can also make some great tax-saving moves before the clock strikes midnight on Dec. 31st.
In fact, changes to Section 179 of the U.S. tax code for 2018 allows contractors to add new software, like estimating tools, or equipment and deduct the full cost up to $1 million. This is a big improvement over 2017 when the maximum deduction was $500,000. The win-win: you can now write off the entire purchase in the first year and reduce your net income and trim taxes.
Break Out the Calculator and Read the Fine Print
Perhaps the main thing to remember when it comes to claiming these Section 179 tax deductions is that you can only write off the amount you spend on qualified purchases. For example, if you spend $10,000, you can write off $10,000. Another thing to keep in mind is that the “phase-out threshold” is $2.5 million. This means a business can spend up to that amount in total equipment before the $1 million limit begins to be reduced dollar for dollar.
When making those big, year-end purchases, don’t forget that you can’t deduct more than your profit. If your business only has $100,000 in profits, you can only deduct $100,000. Another caveat: your purchases like software must be used for business purchases more than 50% of the time to qualify for the deduction.
You’ve Got Questions? We’ve Got Answers
According to Section 179.org, here are three of the most common questions asked by businesses when they are weighing those year-end purchases:
1. How much can I save on my taxes this year?
It depends on how much qualifying equipment and software you purchase and put into use this year. The updated Section 179 Calculator can show your expected tax savings. For example, if you spend $75,000 on software, the deduction can significantly lower the true cost of the equipment purchased, financed or leased. In this example, $75,000 in purchases has a true cost of $48,750 with $26,250 saved.
2. What sort of equipment qualifies?
Most tangible business equipment, both new and used, qualifies. The equipment listed below must be purchased and put into use between January 1 and December 31 of the tax year you are claiming. It can be new, used, purchased, leased, or financed:
- Equipment (machines, etc.) purchased for business use
- Tangible personal property used in business
- Business vehicles with a gross vehicle weight in excess of 6,000 pounds
- Computer “off-the-shelf” software
- Office furniture
- Office equipment
- Property attached to your building that is not a structural component of the building
- Partial business use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes).
- Certain improvements to existing non-residential buildings: fire suppression, alarms and security systems, HVAC, and roofing.
3. When do I have to do this by?
Section 179 always expires at midnight, December 31st. To take advantage of Section 179 this year, you must buy (or lease/finance) your equipment, and put it into use, by December 31, 2018.
Demo Before You Buy
Now that you know that investing in estimating software can help you save on your taxes, why not get started with a free demo? It’s easy to schedule a guided tour with one of our demo specialists today to learn how On Center Software can help you bid and win more work!
*This program does not assume your company will qualify to take advantage of IRS Section #179. Please consult your tax advisor or accountant for additional information. Software must be purchased and placed in service by 12/31/18.