CAN WE AFFORD an IT system upgrade? Is now the right time to invest?
Questions like those can be tough for MSPs to overcome when trying to make a sale. Luckily, Uncle Sam has a tool that can be useful: Section 179 of the Internal Revenue Service’s tax code.
In layman’s terms, Section 179 enables SMBs to deduct the cost of off-the-shelf (but not custom) software and hardware worth up to $500,000 from this year’s income taxes rather than capitalize and depreciate those expenses over a scheduled timetable. This incentive can be a persuasive sales aid for MSPs, since most business owners would prefer to take advantage of that break now rather than later.
Joshua Liberman, president and founder of Albuquerque, N.M.-based solution provider and system builder Net Sciences Inc., says Section 179 allows his company to help clients both justify technology investments and write off some of those expenses.
“We’ve had sales in the $150,000 range that we likely would not have closed without Section 179,” he says.
Devil Is in the Details
As is usually true with the tax code, however, the devil is in the details, and there are a lot of them in this case. While VARs and MSPs can—and should—help their clients understand Section 179, they should also learn as much as possible about the rule themselves (see irs.gov/publications/p946/ch02.html)and refer clients to an accountant or tax preparer without exception.
That last point is critical, Liberman emphasizes. “We do have to do a lot of education,” he states. “Just make sure they don’t construe your suggestions as accounting advice.”
Thom Arrison, CPA, of Vallas & Arrison PC, with offices in Littleton and Burlington, Mass., has done tax preparation for SMBs for over 25 years. He echoes that caution, noting that Section 179 can be more complicated than it seems. For example, he points out, the rule includes an annual cap on spending.
“If you spend more than $2 million, the IRS starts taking away the amount you can apply in Section 179,” Arrison says. “It’s no longer $500,000 after that point.”
Another common misconception among SMBs is that a tax deduction is tantamount to a 100 percent write-off. It’s not. “It’s a deduction, and in the case of a small business, the tax saving is going to be somewhere between roughly 25 and 50 percent of what you paid for the equipment, depending on how much income you have, what type of organization you are, etc.,” asserts Arrison.
In short, Section 179 is not something for nothing. Business owners, and the MSPs who oversee their technology investments, still need to be thoughtful about the investments they’re making.
“It’s never a good idea to spend money to get a tax deduction,” Arrison says. “The tax benefit is a side issue to buying the equipment. If you don’t need something, don’t buy it.”