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When tax season rolls around each year, small business owners have a lot of work to do. They need to gather up a year’s worth of financial information such as income statements, receipts, expenses, and bank statements so they can prepare their small business tax returns. This task is easier for business owners who keep everything organized and maintain accurate records throughout the year. When preparing their returns, business owners always look for deductions and credits to reduce their taxes.
The IRS has many tax breaks that help small businesses keep some money to run their operations. One of the most popular and widely used tax incentives for businesses is the Section 179 tax deduction. If you purchase or finance eligible equipment and take a Section 179 deduction that surpasses your taxable income, you can carry that amount over to next year. But, have you ever asked yourself the question, “Just what is the Section 179 carryover?” If so, this Balboa Capital blog post can help. It has all of the information you need, including an example of how the Section 179 carryover works.
About the Section 179 carryover.
The Section 179 tax deduction is straightforward. Certain types of business equipment, also referred to as property, can be expensed when placed into service. In addition, the IRS established annual deduction limits for qualifying equipment and limits on bonus depreciation. Therefore, if your accountant or tax advisor says the equipment you want to purchase is eligible for the Section 179 deduction, you can buy it, use it, and expense it on your tax return.
Sounds easy, right?
Well, Section 179 might be confusing if you purchase equipment and your business’s revenue falls short for some unexpected reason. Here is an example: A commercial painting business owner buys two work trucks and several roof rigs for $150,000, all of which qualify for Section 179. The owner takes $150,000 of Section 179 but only has $100,000 of taxable income before the deduction. The $50,000 difference ($150,000 minus $100,000) is carried forward to the next taxable year.
Section 179 carryovers can get complicated, which is why most business owners hire a tax professional to complete their tax returns. This helps ensure that the upcoming year’s carryover amount will be accurate and applied to the tax return, thereby giving business owners a nice deduction. However, business owners who do not use tax experts or accountants risk filing returns without the carryover amount included. The reason is they might forget about it or not understand how to apply it.
Equipment buying strategies.
If you need to invest in capital equipment that qualifies for the Section 179 deduction, and you are worried that your taxable income might decrease this year, there are a few things to consider. New or upgraded equipment, technology, software, and vehicles can help improve productivity and drive profits. Plus, many types of equipment, such as machinery, cranes, forklifts, and conveyor belts, need to be replaced with newer models with better safety features.
As you can see, acquiring new or updated equipment presents your business with some excellent benefits. So, if your annual taxable income ends up being lower than you predicted, at least you have the right equipment for your business. Moreover, you can take advantage of the Section 179 carryover and get a generous deduction in a future taxable year, so long as the equipment qualifies for Section 179.
How to get the deduction.
To elect the Section 179 deduction, you must complete IRS Form 4562. When completing this form, you will need to provide information relating to the business use of qualifying business equipment/property along with its depreciation and amortization. In addition, there is a specific line item on the form to enter the carryover of any disallowed deduction from the previous year.
As mentioned earlier in this blog post, the carryover is the amount of Section 179 equipment you elected to expense in the prior year that could not be deducted due to the business income limitation. Balboa Capital recommends that you speak to a tax expert or an accountant to ensure that your form is completed correctly.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.