As we turn the page to a new year, it’s time to consider how to level up your business for maximum return. While the prospect of investing in automated equipment might sound daunting at first, it can become more feasible when you consider the tax breaks available to offset the initial investment costs. Rather than waiting for funds to become available to begin investing in your business, we’ve outlined some of the available tax savings that you can take advantage of.
Section 179 of the IRS tax code is a tax deduction that allows companies to write off the full purchase price of equipment or software in the tax year that it was purchased. This accelerates depreciation to a single year instead of writing it off a little at a time.
For example, let’s say a company would like to buy an automated assembly machine for $75,000 that was depreciable over five years. They would typically only be able to write off $15,000 a year for five years, which without the tax deduction, might make justifying the purchase a little difficult. But, with Section 179, that same company would be able to deduct the entire $75,000 in equipment from their gross income. As a result, this would enable them to remain competitive and profitable by buying the equipment they need while not taking away from overall tax revenue.
How to Qualify
Although there is a cap of $1,050,000 for the deduction limit and a spending cap of $2,620,000, both new and used equipment qualify for the Section 179 tax deduction (as long as the used equipment is “new to the business”). This is an exciting update from previous years where businesses could only deduct 50 percent of the equipment value in the first year.
This mean that you could potentially buy and write off more equipment as long as your purchases meet the following eligibility requirements:
- The purchase must be considered “qualified property.” This means that it must be tangible, depreciable, and used at least 50 percent of the time in the active conduct of business. This includes most material goods used by manufacturers, including “off-the-shelf” software, office equipment, machines, and business vehicles.
- The equipment must be put into service by December 31 of the purchase year.
- It cannot be obtained from a related party, including siblings, spouses, parents, grandparents, businesses, trusts, and charitable organizations with which you have an established relationship.
How to Claim
The Section 179 deduction is easy to claim on taxes. All you have to do is fill out Part 1 of Form 4562 and attach it to your tax return. This form must include a description, the cost, and the amount claimed from the qualifying purchase.
R&D Tax Credit
In addition to the Section 179 tax deduction, the Research and Development (R&D) Tax Credit is available to help both startups and established companies offset the costs related to the development and implementation of automated machines and equipment.
In short, the R&D Tax Credit is a non-refundable amount that businesses can subtract from their total taxable income. Typically, 6 to 8 percent of a qualifying R&D expense can be applied against the federal income tax liability. This credit encourages research and experimentation by rewarding businesses that pursue innovation.
How to Qualify
Unfortunately, only 5 percent of businesses that purchase automated systems take advantage of this credit due to common misconceptions, even if they qualify. What started as a tax credit pertaining to basic research for laboratory expenses has grown into a lucrative incentive that can benefit a wider variety of businesses, even if your employees aren’t degree-holding scientists and engineers.
The tax credit may apply to any company that improves or creates new products or processes. More specifically, eligibility is dependent upon a four-part test:
- Purpose: The purpose of the research activities must be to improve products or processes or create new products or processes that result in increased performance, function, or quality.
- Uncertainty: The business must prove that it has attempted to eliminate the uncertainty of capability, method, or design in the creation or improvement of the product or process.
- Technological: The product or process must be technical in nature, meaning it must have a basis in fields, such as engineering, physics, biology, chemistry, or computer science.
- Experimentation: In creating or improving a product or process, a process of experimentation must be demonstrated through activities, such as modeling, simulation, or trial-and-error.
Given that criteria, the R&D Tax Credit qualified expenses could include designing and building an automated system or upgrading a piece of outdated equipment.
How to Claim
Businesses can simply claim the R&D Tax Credit by filling out Sections A-D of Form 6765. When completing, make sure to identify the qualifying expense and provide sufficient documentation, including financial records, business documents, and technical reports, that demonstrate that the requirements of IRS Section 41 have been met.
Invest in Industrial Automation Equipment
With the help of tax credits and deductions, manufacturers can obtain the capital needed to invest in industrial automation equipment. As the largest and most capable engineering company, Steven Douglas Corp. (SDC) has the experience and capability to design, engineer, and build a custom automated machine for your specific applications.
Whether you require an assembly or processing machine, a test and inspection machine, a material handling system, or something completely custom, our creative problem-solving approach and team of experts has extensive experience across a broad spectrum of industries to solve your toughest automation problems. Contact SDC today to discuss your upcoming automation project, and in the meantime, check out some of our past projects.