On this episode of ToiletTalk, we talk with Jonathan Langley, a CPA that helps portable sanitation businesses with their taxes. Learn how you can save money with this deduction.
Matt: Hey Matt here in the ServiceCore studio. Today’s episode is all about saving you money. That’s why we’re sitting down with a CPA to talk about the Section 179 tax deduction. It allows you in 2022 to deduct over a million dollars for purchases like equipment, office furniture, vehicles, software, and more. You don’t want to miss this episode. So let’s get back in the booth and get this started right this way.
Hey, Jonathan, thanks so much for joining us today. What do you think of the inside of our studio?
Jonathan: Yeah, you’re welcome, man. It looks awesome.
Matt: Nice. So today is a really important toilet talk because I think this information is gonna be so valuable to our customers and those in the portable sanitation industry. It’s all about the section 179 tax deduction. So let’s start off by first covering what is the Section 179 tax deduction and who is it for.
Jonathan: Yeah, absolutely. So Section 179 best way to describe it is it’s, it’s a way for a business who is purchasing assets. So capital assets, you think of vehicles, equipment software, for example, specifically kind of what we’ll address here today. It’s a great way to write off those assets in one year when you purchase those, the IRS, tries to incentivize small and medium businesses so that they can take tax advantages. So you may have this large capital cost upfront, but then you’re able to also offset that with reduced tax costs at the end of the day.
Matt: Got it. So, what I’m hearing is, hey, this could save you money. So everyone better get their listening ears on and perk up. So what, what items qualify for being expensed under Section 179?
Jonathan: Yeah. So in general, it applies to tangible personal property. So if you think of separate items that are not attached to a building, there can be some exceptions to that. But you know, if you think of trucks, vehicles, if you think of any kind of equipment used in your business, those qualify also what’s turned and if you search this Section 179 it would be off-the-shelf software. So that term is a little bit antiquated. Nowadays, we have cloud based software, more modern technologies. That’s the initial thought though, if you’re purchasing software, whether that be cloud based, whether that be, you know, kind of the old school put the CD in those costs if it’s not customized, if there are a couple other criteria, you’re gonna be able to write those off through Section 179. So it, it encompasses a lot of items. The two things to keep in mind and I think we’ll touch on this in a few minutes are land and land improvements. Those are excluded. So, if you think of the hard real estate items, that’s what wouldn’t qualify. But everything else, there’s a large bucket, that will qualify for section 1 79.
Matt: Nice. So if I’m a PRO and I bought a new truck this year or a couple of new trucks that qualifies and, for our customers that have purchased service core, service core also qualifies for that so you can write off the amount of service core that you paid in the year. Can you tell us a little bit more about just for our customers how the software write off works?
Jonathan: Yeah, absolutely. So typically, and it depends on your individual contract, what I often see is, you know, maybe a set up fee. So most, most individuals might capitalize that set up fee if it’s across an annual period or maybe it’s a two year period. So you’re gonna capitalize that. If you capitalize that software component of the set up fee, you would be able to use Section 179 on that. And also we’ll talk about it in a few minutes, bonus depreciation. So that item you’d be able to capitalize and expense take that benefit in 2022 if you purchase that asset and place it in service before the end of 2022. So that’s one component of that.
There’s also a breakout. So if you think of a monthly licensing fee, if if any users have quick books online, that may be the best example that you see, you purchased this online third party service, kind of, it’s a cloud based service. So from that, you’re gonna get these monthly charges that come through same thing, those are typically gonna be treated as lease payments and you’re gonna expense those in the months they’re incurred if it’s a cash basis, taxpayer, cash basis, taxpayer. It’s a fancy way of just saying you’re reporting things, cash in, cash out. You’re not expensing things when you get the bill, you’re actually gonna expense those as they come along that could also change, you know, if you paid two years in advance on that leasing fee that might get amortized and expensed over a longer period. But if you’re looking at monthly, licensing fees, those are more than likely gonna be expensed out, right.
So, so big picture, I think what I wanna demonstrate or at least explain is a lot of the software costs, whether you’re gonna capitalize it or expense it, depending on the terms of the agreement, you’re gonna be able to at the end of the day expense that either through depreciation from writing those off or as an expense on your income statement that will ultimately end up on your tax return.
Matt: That’s awesome. So I think a lot of our listeners, you know, use Quickbooks online as an example. So that was a perfect example that you used and I’m not sure everyone realizes that you can write that off under Section 179 as well as costs for things like ServiceCore. So hopefully that will help our customers as well. You mentioned a bit about the items that may not be qualified for under Section 179. Can you elaborate on that a bit? What doesn’t qualify?
Jonathan: Yeah, sure. So big two things to keep in mind again are land and land improvements. So real-estate-related items typically will not qualify back at the end of 2017. You may remember the Tax Cuts and Jobs Act, it was a huge tax change and a lot of changes there for tax preparers, tax professionals and business owners as well. But from that, there can be qualified improvement properties. So I don’t wanna say all real estate is included. It gets complicated, just kind of following those rules.
But in general, I would say if you’ve got trucks, software, vehicles, and equipment that are stand-alone pieces of I guess assets is the best way to say that those are gonna be eligible for 179. So I would, I would put in the bucket that’s, that’s probably not land, land improvements, real estate related items.
Matt: Got it. Great. Thanks for clarifying that. As with anything, there are limits. So, can you talk to us about the limits, for 2022 under Section 179?
Jonathan: Yeah, absolutely. So I’ve referenced this if I’m looking up, that’s why. But, so for 2022 because I’m gonna give you the 2023 numbers as well. 1,080,000 is the 2022 limit for Section 179. And the complicated part about this is there’s also a cap on Section 179. So the cap for 2022 is 2.7 million and asset purchases. So what that means is you can take your full 1,000,080,000. As long as you haven’t purchased assets more than 2,700,000. So it gets reduced once you’re over the 2,700,000, it gets reduced dollar for dollar every dollar that you’re over that 2.7 million number.
So while Section 179 there, there’s huge benefits there. You do have to look at how much you’re spending for most small businesses. If you’re if you’re a startup, I would say, you know, if you’re just getting into, for example, the portable toilet business, you might buy multiple trucks. If you’re ramping up in a high growth area. If you’re gonna outright purchase six or seven trucks, portable units, new software, vehicles, equipment, you might exceed that threshold so that’s one thing to look at, if you’re just starting, you know, you’re smaller, you may not hit that 2 million, 72.7 million number. So that’s one thing to think about is just how much am I spending in assets and that’s across the tax year. That’s the first item.
So those are the 2022 numbers giving you the 2023 numbers. So it is for 2023 1,160,000. And then that cap goes up to 2,890,000 and that’s index typically to inflation. So you’ll see those amounts increase as inflation increases each year.
Matt: Got it. And you know, so it fluctuates each year and kind of like, as you said, follows the course of inflation, but it seems to be that some years there are certain things and others, there are not one of those things is bonus depreciation. Can you talk to us about bonus depreciation? What it is and then what are the limits in 2022 and maybe 23 if you have that as well.
Jonathan: Yeah, absolutely. So thanks Matt, the, the benefit to me oftentimes I’ll use bonus depreciation before Section 179. So we’ll talk about some benefits and, and drawbacks in a couple of minutes. But right now through the end of 2022 we have 100% bonus depreciation again, a fancy term to say that whatever you capitalize, you could write off 100% of that in the tax year. 2022 it’s a 100% bonus depreciation.
2023 that drops to 80%. A big incentive before the end of the year to purchase equipment, software to kind of look at that if you’re in a position, you know, cash flow wise to invest in those assets, the other advantage and we haven’t talked about this in regard to Section 179, 1 limitation on Section 179 is that you have to have a taxable income. So I remember when Section 179 first came out my very first year in the tax world, it was one of those things where client was in the negative. We had expensed 179 to the max. Well, they were in the negative once we had done that. So there’s a carry over that can happen of Section 179 you could carry that over to 2023 if you’ve exhausted all of your business income, but most clients don’t wanna do that. So there is a, you know, future first year of operations, you’ve purchased trucks, you’ve purchased all this new equipment your, your income has not started to increase yet. You’re more than likely gonna use a combination of either all bonus depreciation for a software purchase for trucks, for other equipment. You might use a little bit of Section 179 also.
So there’s two really routes and that’s what I’ll look at for clients this time of year beginning of December. We’re always tax planning. It’s looking at how much net income taxable, net income you have. You know, is it better to invest in assets that will grow your business? You’ll also have some tax setting here too. So that’s the I’ll say two prong approach looking at Section 179 and bonus depreciation that can both provide significant benefits for a business and they’re both eligible if you made a software purchase also.
Matt: Got it. Great. Thank you for clarifying that. That’s why we have people like you because you, you help out the folks that we work with and help clarify all of this. And for our audience, we’ll, we’re gonna provide Jonathan’s information to contact him. If you have questions for your business, we’ll put it right below the video. He’s also a really nice guy to talk to. So we’ll, we’ll get you set up there.
Jonathatn: How much of one other thing too I think is, is helpful to point out. So typically when I’m looking at that difference. So, you know, you’re gonna you’re looking from a client perspective of what’s do I purchase the software? Do I purchase the truck or, or do I not? So, on the tax side, I’ll also look at 179 versus bonus depreciation in regards to the state that a client’s in. So some states don’t conform to bonus depreciation is a federal concept. So some states, for example, I’m based out of Nashville, Tennessee. Tennessee does not conform to federal bonus depreciation. So if I take federal depreciation for bonus, I might have a state ad back because I’m looking at the life of that asset under that state’s rules. So that’s another thing to look at. There’s, there could be a swing there depending on the states. Most states don’t conform to bonus depreciations. Some could. So looking at those rules in concert as well.
So two things to keep in mind just to recap taxable income limits for 179. And then also, is it more beneficial to take 179 if that state conforms for 179 as opposed to bonus where you might have that swing in income where you owe more to one particular state than another.
Matt: Got it. That’s really good information. As we wrap this up, is there anything else that our audience should know about 179 or bonus depreciation or just considerations as they’re thinking about the last minute purchases before the end of the year.
Jonathan: Absolutely. I would say plan ahead. You know, if you don’t have your November financials closed out, you know, within the next couple of weeks, that’s the best way to look at where you stand. Take a look at that net profit. Once you cross 12/31 you really can’t do much to impact your tax liability for 2022. But there’s a lot of tools out there available. Section 179 and bonus appreciation are, are the two you know, namely that a business that’s asset incentive that’s trying to grow their business great way to save tax there.
But, you know, go ahead and get started now and start thinking about that because you do have a few weeks. I do wanna mention to you, you need to put those assets in service. If you purchase it, you need to, you know, make sure you’re actually running that truck or running the software, you have that, that up and going. But it’s, you know, nowadays cloud based software, that’s fairly easy process compared to what it used to be. So, but think about those things, you know, we’re in a perfect time frame first week in December. You can do things now that can impact your tax liability and can also improve your business.
Matt: Nice. Well, Jonathan, thank you so much for being our guest today. You brought some super valuable information and again, for our audience if you want to talk to Jonathan about your business, we’re gonna put his information right below this video. Please hit him up so that way you can get the information, you need to make the proper tax decisions for your business. Thank you so much, Jonathan, really appreciate having you on.
Jonathan: Thank you man. I appreciate it also.