How to Use the Section 179 Tax Deduction for Your Childcare Business
Are you taking advantage of the Section 179 tax deduction for your Early Childhood Education business? In this article, we provide an overview of Section 179 of the U.S. internal revenue code and show you how you can use this tax incentive to save money for your childcare business. Read on to learn more.
What is Section 179?
Section 179 of the internal revenue code is a tax incentive that allows businesses to deduct the total cost of eligible expenses purchased or financed during the tax year on their tax return. With the Section 179 deduction, business owners can deduct the full purchase price of qualifying assets, like equipment, computer software, and certain vehicles from their gross income for the tax year in which the items were purchased and put to use. Ultimately, taking the Section 179 deduction means that business owners can write off the complete cost of an asset all at once instead of writing it off a little every year through depreciation.
Section 179 was enacted by Congress to encourage small and mid-sized businesses to invest in their businesses. As a childcare business owner, you can benefit from the Section 179 deduction when you make qualifying purchases for your company. Here’s how it works:
How Section 179 Expensing Works
To use the Section 179 deduction you’ll need to make a qualifying purchase for your Early Childhood Education business:
- Office furniture and equipment
- Computers and software
- Personal property used for business purposes
- Certain large vehicles, like passenger vans or buses
The business assets you purchase must fall within the expense guidelines set forth by the IRS:
The deduction limit for 2023 is $1,160,000 and the spending limit for equipment purchases for 2023 is $4,050,000. The deduction begins to phase out on a dollar-for-dollar basis after you reach the spending limit.
Section 179 Deduction vs. Bonus Depreciation
Good news! You can use both Section 179 and bonus depreciation in the same year for qualifying purchases. In general, the business assets that qualify for Section 179 are also eligible for bonus depreciation. Remember, according to the most current tax law, bonus depreciation is on a phase-out schedule, meaning that for 2023 you can take 80% bonus depreciation, in addition to Section 179.
In order to claim both tax incentives, you will need to use Form 4562. First, Section 179 is applied, followed by bonus depreciation. Here’s an example:
Let’s say in 2023 you total $1,400,000 worth of qualified business expenses for your Early Childhood Education company. You would write off $1,160,000 (the maximum amount for 2023) first. Then, you’d calculate bonus depreciation (80% for 2023) and add it to your Section 179 figure. The total represents your first year deduction.
Since Section 179 and bonus depreciation entail quite a few rules and regulations and must be calculated correctly, we always recommend working with a qualified tax expert who is familiar with both of these tax incentives.
Here at Honest Buck Accounting, we encourage all of our Early Childhood Education clients to take advantage of as many tax incentives as possible. Need advice about Section 179, bonus depreciation, or your business tax strategy in general? Reach out to our team of professional accountants today.