Small businesses face various costs, especially when trying to start and scale. Equipment, machinery and other tools like field solutions for your construction project can quickly add up. While these costs may seem daunting at first, the Section 179 tax deduction can help by allowing your company to acquire and begin using assets. However, only some property qualifies for the Section 179 tax incentive.
Keep reading to discover what you can claim under Section 179 for construction to help your company's bottom line. Then, ensure you maximize tax season by reviewing available construction tax deductions and credits.
Section 179 Deduction vs. Bonus Depreciation
First, it's crucial to understand the similarities and differences between the Section 179 deduction and Bonus Depreciation.
Section 179 Deduction
What is Section 179? This tax incentive is specifically for businesses that spend less than $3.78 million annually. If you qualify, you can deduct the entire cost of equipment the year you purchase it, but only if you start using it that same year. Instead of slowly writing off equipment through depreciation, the Section 179 tax deduction allows you to write off the total purchase price of qualifying equipment that you buy.
The deduction encourages small business owners to invest in their company by buying more equipment when they need it rather than waiting for depreciation, as entrepreneurs save more money the year they purchase an asset. If your taxable income exceeds the Section 179 expense, consider using Section 179 to fully expense some products while allowing others to depreciate. Further, companies can write off the equipment, allowing them to deduct the entire price without purchasing.
While Section 179 allows you to deduct a certain amount of new business assets, Bonus Depreciation allows you to deduct a portion of the cost according to a set percentage. In 2022, this percentage is 100%. Keep in mind that some years the Bonus Depreciation is offered, and some years, it is not offered. While Section 179 can give you greater flexibility on when you receive your deduction, Bonus Depreciation may apply to greater spending in a year. With Bonus Depreciation, you are not restricted by annual limits on deductions.
What Qualifies Under Section 179?
Only specific equipment qualifies under the Section 179 tax deduction. To count for a write-off under Section 179, materials and equipment can be either new or used. However, it must be the first time your company has purchased, and you must have started using the equipment during that tax year.
Qualifying equipment under the Section 179 tax incentive includes:
- Construction technology equipment such as robotic total stations and laser scanners
- Construction software such as project control software, estimating software and jobsite access software
- Construction laser levels
- GNSS receivers
- Equipment associated with construction field layout
Some business vehicles also qualify for Section 179 write-offs, including those weighing more than 6,000 pounds and used for business at least half the time. Examples include cargo vans, large passenger vans, ambulances, taxis or heavy construction equipment.
The Section 179 tax deduction is different from a bonus depreciation in that Section 179 can only be deducted to the extent of taxable income. Further, while depreciation allows you to distribute the cost over several years, Section 179 deducts the whole cost upfront. However, you can use both in the same year to reduce both your federal and state income taxes. Businesses usually use bonus depreciation after they reach the Section 179 spending cap.
How Does Section 179 Benefit Businesses?
Section 179 helps businesses by letting them deduct the total purchase price of equipment, machinery and vehicles that are new to their company before paying off their loans. Purchasing new equipment can be expensive. Though the amount you can deduct remains the same with the Section 179 tax incentive, you receive the deduction all at once rather than over several years.
Purchasing new equipment can be a high cost for companies trying to establish a foothold in the marketplace. However, Section 179 incentivizes small businesses to invest in their growing company and immediately start using new equipment. Plus, Section 179 can often be more cost-effective for small businesses.
This speedy deduction may provide significant tax relief if you need to purchase startup equipment for your new business. To qualify for this deduction, your equipment must adhere to the specifications in Section 179 and the purchase price needs to fall in the dollar amount ranges specified by Section 179. If your equipment also qualifies for Bonus Depreciation, you can further lower your tax bill.
What Are the Limits?
Though the Section 179 deduction benefits businesses by allowing them to write off equipment, it also comes with limitations, including a deduction limit and an equipment purchase cap. Section 179 only limits companies to their net income for their maximum deduction, meaning they can't deduct more money than they made.In 2022, Section 179 has a deduction limit of $1.08 million.
Businesses can only buy a specific amount of equipment before the deduction begins decreasing dollar by dollar. The maximum a business can spend on equipment purchases according to Section 179 property limits is $2.7 million. Companies that spend more than $3.78 million annually do not qualify for the Section 179 tax incentive, as the deduction is only for small businesses. However, larger companies can take advantage of the current 100% bonus depreciation rate.
Before claiming Section 179, you'll also have to make sure your purchases qualify for the tax incentive, as Section 179 does not cover specific equipment and property.
Property not covered includes:
- Buildings or real estate
- External building improvements that expand the structure's size or change its framework
- Enhancements made to a property before construction completes and the building is in use
- Elevators and escalators
- Land and landscaping
- Docks and swimming pools
- Non-mobile trailers and billboards
- Soft, intangible assets such as brands, copyrights or patents
Other characteristics disqualify property and materials, including if it's:
- Used less than half the time for business or trade purposes.
- Acquired as a gift or through inheritance.
- Belonging to tax-exempt organizations or the government.
How to Benefit From Section 179
Construction companies must include Section 179 in their tax return to benefit from the incentive. Section 179 for contractors does not automatically apply — you must elect to take the deduction. Below, we'll discuss the steps your company should take to benefit from Section 179.
Consult With a Legal or Tax Professional
Tax professionals can help you determine whether the Section 179 tax deduction is more beneficial than depreciation. However, claiming the total price with the deduction is more cost-effective than allowing assets to depreciate, as depreciation takes several years for you to reap the full benefits.
Because the tax incentive is only for small businesses, it's better to deduct the entire price upfront so you can begin to profit from new equipment. A professional can also demonstrate how larger companies can benefit from bonus depreciation.
A tax professional can also verify whether an asset is eligible for the Section 179 deduction. To qualify, an asset must be purchased, tangible and used entirely for your business. Tax professionals know how to navigate tax laws and regulations and are familiar with deductions that might be confusing for business owners and individual taxpayers. With a trusted tax professional on your side, you can rest assured that your business taxes will be done right.
Account for All Purchases
To get the maximum benefit from the tax incentive, you should review the Section 179 limits and which items qualify. Assets must be tangible, used at least half the time for business and either purchased or leased — not acquired as a gift. A tax professional can also help you assess your assets to determine which qualifies for Section 179.
You'll also want to double-check when you started using the equipment. One of the most significant advantages of Section 179 is that businesses can acquire and begin using an asset immediately. However, companies must start using an asset during the tax year they claim it. For example, if your business buys an item on the last day of 2022 but doesn't use it until 2023, you can only claim that deduction in the 2023 tax year.
Claim the Deduction
After reviewing your assets, you can claim the deduction on Part I of Form 4562. On line 6, document what property you'd like to write off, its price and the Section 179 amount you're claiming for that belonging. Finally, include the form with your tax return to start benefiting.
For example, if your small business purchases a new machine for $40,000 with zero salvage value and it is used 100% for business purposes, your company could write off a portion of the asset each year as it depreciates. With Section 179, on the other hand, you can write off the entire $40,000 purchase in one year. This can provide you with significant savings when your business needs it most.
How Does It Apply to Construction?
Construction business owners can take advantage of the Section 179 tax deduction to invest in large equipment, machinery and tools when they need them. Section 179 makes new tools and equipment more immediately accessible for small businesses, helping them stay up to date with current technology and limit depreciation.
Receiving a larger deduction all at once rather than over several years allows companies to profit immediately. Instantly using new equipment also lets your company assess your previous assets and identify new needs. For small companies, in particular, the deduction can help offset the construction labor shortage.
Construction companies can also claim the Section 179D Commercial Buildings Energy Efficiency Tax Deduction after designing qualifying buildings and systems on government property, benefiting from a deduction of up to $1.80 per square foot. Building owners must implement interior lighting, a building envelope or climate control and water heating systems that reduce energy costs, as calculated by a qualified software, by at least half compared to ASHRAE Standard 90.1-2007 minimums if built before Dec. 31, 2020, or Standard 90.1 after Jan. 1, 2021.
Construction companies must contribute to the design of these energy-efficient government-owned buildings to benefit from the deduction. However, unlike business owners, who can retroactively claim the deduction, construction companies must include 179D on their tax returns during the same year they implemented the services.
Using Construction Management Software
Understanding what equipment you can write off under Section 179 helps your bottom line by saving you money at tax time. Maximize your profits by writing off construction surveying and workforce tracking software with the Section 179 tax incentive.
At BuildingPoint SouthEast, our software tracks site attendance and time worked through a hard hat beacon, stores safety documents, automates reports and streamlines workforce communication. Since 2016, we have been helping contractors and businesses in the construction industry apply superior, advanced technology to build great projects.
Other Common Construction Tax Deductions
In addition to the Section 179 tax incentive, construction companies and contractors can also claim various other tax deductions, including vehicle and mileage-related costs, the price of equipment, advertising charges and deductible fees. Additionally, employees could be eligible for lifelong learning tax credits.
Work-related fuel costs can be one of the most significant expenses for construction companies and their employees. Workers often use company cards to pay for gas when traveling to and from the office, job sites, for client visits or when purchasing new tools and equipment.
The IRS uses either actual expense or standard mileage to determine how much your vehicles cost annually. You should calculate expenses by using both of these to determine which deduction is more considerable. However, you must use standard mileage during the first year you begin using a vehicle for business purposes.
Actual expense requires you to find the total operating expenses for your vehicle, including:
- Leasing payments
- Insurance fees
- Oil changes
- Licensing, registration and title expenses
Standard mileage is a more straightforward way to determine your vehicle's expenses, as you only have to keep track of a vehicle's total annual mileage. Multiply the number of miles you use your vehicle for business purposes by that tax year's standard mileage rate. The rate changes each year. In the final half of 2022, you can deduct 62.5 cents per mile of business travel. For the first half of 2022, the mileage rate is 58.5 cents. Standard mileage only covers the total miles you used a vehicle. Other expenses like repairs are not included when mileage is taken.
To get the maximum mileage deduction, you should document the date, purpose and how many miles you traveled for each trip. Mobile apps can help you track and manage miles in one place. After the first year, you can use actual expense, which is especially helpful for significant expenses like vehicle repairs.
Tools, Equipment and Machinery
You can also write off tools and equipment used for a job like construction personal protective equipment. You can completely deduct the cost of tools the year you purchased them with the Section 179 tax deduction. Other equipment, like compressors, cement mixers or ladders, are business assets that will depreciate over multiple years.
Specialized equipment like hard hats, tool belts, steel-toed boots and uniforms are also deductible. Employers can reimburse their teams for these expenses. However, employees can also write off this equipment's expense in their taxes if they do not receive a reimbursement.
Construction companies can also claim the costs associated with advertising and marketing. While advertising spreads the word about your company, your marketing efforts are what pulls in new leads and customers. Though you may occasionally get some organic results, companies often need to invest some money into advertising and marketing. You should be sure to document all digital and print advertising charges, including expenses associated with producing marketing materials such as printing costs, paper and video equipment. Track your investments made in digital channels and print advertising and media.
Construction professionals can continue to grow their skills to maximize their career success. The price of professional development initiatives is deductible. Fees covered include:
- Tuition for trade school and training
- Subscription to trade publications and technical journals
- Memberships and subscriptions to construction business organizations, associations and unions
- New licensing and license renewal fees
Cost deductions for continuing education and professional development initiatives can help your bottom line during tax time. However, contractors can only deduct the costs of furthering their education if it relates to their current career path — they cannot claim a deduction if they were training in preparation for a career change.
If you prefer, you can also apply to tax credits rather than collecting an education deductible. The American Opportunity Tax Credit covers an annual maximum of $2,500, and the Lifetime Learning Credit covers $2,000 per student.
Partner With BuildingPoint Southeast
As an authorized Trimble tool dealer, we'll help you maximize job site efficiency while minimizing costs for your growing small business. With locations and team members present across the Southeast, including Virginia, Georgia, Washington D.C. and the Carolinas, we are equipped to provide the local support and service your business needs. Contact our team at BuildingPoint SouthEast today to discover how our solutions and services can maximize your profits!