Did you know you can deduct the cost of your newly-purchased computer hardware and software? The IRS gives three options that benefit companies purchasing computer hardware and software.
1. Section 179
The IRS through Internal Revenue Code Section 179 has provided that computer hardware and software purchased for the use of business can be deducted as an expense in the year it is placed into service. For the 2016 tax year, a company may deduct up to $500,000 of newly purchased computer hardware or software whether it is new or used. However, the software must not be modified or customized, but must be available to the general public. You must make an election to claim a Section 179 deduction in the year that you take it.
2. Bonus Depreciation
Bonus deprecation, under Internal Revenue Code 168(k), allows a 50% deprecation rate in the first year of use for newly purchased computer hardware or software in the 2016 tax year. Bonus deprecation is available for only new assets placed in service within the tax year. It cannot be applied to used assets, even if they are newly purchased. Unlike Section 179, there is no limit to the amount of bonus deprecation a taxpayer can take in a given tax year.
3. De Minimis Election
Taxpayers may also elect to make an annual de Minimis Safe Harbor election for the year and expense any assets purchased that are less than $2,500 under Internal Revenue Code Section 263(a). Each asset less than $2,500 does not have to be capitalized, but must be deducted as an expense in the year the asset is placed in service. If the taxpayer has an internal policy on the amount of expense that should be taken, then that policy should be followed within the guidelines of the election, but no more than $5,000. This $2,500 deduction per item does not count towards your Section 179 deduction.
The important thing to remember no matter which option you chose, is to keep a record of your purchases in order to accurately identify the specific computer hardware or software, how much you paid for it, how it was purchased, and when it was placed into service. The regulations on deprecation change from year to year so it is important to contact your tax advisor when deciding which options are best for you and your company.
About the Author:
Mike is the Senior Manager in charge of the Construction Tax & Department of Saltmarsh, Cleaveland & Gund. He has been working with construction and real estate clients since 1997. Mike has served over 250 contractors and developers in both the public and private sectors. His primary areas of concentration include providing audit, review, tax compliance, tax planning and consulting, multi-state taxation, working capital and surety consulting, cash flow management, IRS audit support, construction accounting software consulting and continuity, succession and strategic planning services for the firm’s clients. For more information, please call 1-800-477-7458 or visit www.saltmarshcpa.com.