For the construction industry, 2018 has been a crazy year of highs and lows. While project backlogs hit a record 9.9 months in the second quarter of 2018 (ABC), contractors of all trades have felt the squeeze from tariffs and rising fuel and labor prices. Material costs increased 7.4% over 2017 in September (AGC) and labor continues to be tight as 80% of firms struggle to fill jobs.
While high demand is never a bad thing, contractors could probably use some good news that puts dollars in their pockets. For small- to medium-sized contractors, the excellent news out of Washington, DC, is that changes to Section 179 of the U.S. tax code are adding up to great savings for contractors who add new estimating software or equipment before the end of 2018.
Deduct Up to $1 Million
Even if taxes are the last thing on your mind, being able to deduct a cool $1 million is not too shabby. Unlike previous years where the maximum deduction of Section 179 was $500,000, the Tax Cuts and Jobs Act (TCJA) now allows taxpayers to write off up to $1 million.
This means it’s a great time to take advantage of Section 179 by making year-end purchases on tangible property like off-the-shelf estimating software. What happened? This depreciation deduction dates to 2008 as part of a stimulus plan and was designed to provide tax relief to small businesses. While the total deduction has been on a roller coaster ride ever since, Congress opted in 2018 to double-down and increase the previous $500,000 deduction to $1 million.
What is helpful for contractors is that it allows them to write off the entire costs of a purchase in the year it is purchased. As long as the software or equipment is bought and put into service by December 31, 2018, it can be taken as a tax deduction. This includes things like software, office furniture, printers, and other devices.
Write it Off All the Way to the Bank
Ready to trim your tax bill? Here are a few facts to note about the Section 179 deduction:
- You can only write off the amount that you spend on qualified purchases. Spend $1 million and deduct $1 million. Spend $10,000, write off $10,000.
- 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.
- You can’t deduct more than your profit. If your business only has $100,000 in profits, you can only deduct $100,000.
- Your purchases like software must be used for business purchases more than 50% of the time to qualify for the deduction.
There’s a Bonus, Too!
While Section 179 may seem straightforward, you should also know there is bonus depreciation, which was scheduled to drop from 50 percent in 2017 to 40 percent in 2018. Now, it has increased to 100 percent for the 2018 to 2022 tax years.
What’s new? The main difference is how it now applies to both new and used equipment. This is a change from previous years where bonus depreciation only covered new equipment. Tax experts point out that bonus depreciation is helpful for larger businesses who spend more than the Section 179 spending cap of $2.5 million on new capital equipment.
Boost Your Profits with Tax Break
The bottom-line on Section 179 is that contractors can write off an entire purchase in the first year and reduce their net income and trim taxes. Rather than having to spread out the deduction over a normal five-year depreciation schedule, you can write off the entire cost in the year the purchase is made.
As dull as taxes can seem, a potential $1 million tax deduction is exciting. Ready to send less of your hard-earned cash to Uncle Sam? The win-win is that this deduction is specially designed to boost profits. By deducting the full cost of these expenses, you can lower the amount paid for equipment or software substantially.
Now that you know that investing in estimating software can help you save on your taxes, why not get started now with a free trial? It’s quick and easy to request a 14-day, risk-free trial. You’ll still have plenty of time to lock in your tax savings. Get started now.
*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.