Purchasing a new POS solution for your retail business is an important step for your company, for your employees—and possibly for your taxes, too.
Eric Gustin, VP Technology Group at Byline Financial Group, explains that Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. “If you buy, lease, or finance a piece of qualifying equipment, you can deduct the full price from your gross income. The amount saved in taxes in the “put in service” tax year can exceed the payments made on a financing contract for that tax year,” he says.
In practical terms, here’s how section 179 applies to POS systems, software, and professional services (SAAS or on-premises):
- If you purchase or finance software in 2022 and meet the requirements, you may be able to deduct up to $1,080,000 of the purchase from your gross income.
- A vast majority of businesses using Epicor retail solutions will not exceed the section 179 limit of $1,080,000, and bonus depreciation considerations are minimal.
- If your purchase does exceed this limit, you can use the 100% bonus depreciation for your overage in 2022.
- If you finance, you can deduct the entire purchase price even if you don’t pay the entire purchase amount in 2022.
- The 2023 tax year will have the same $1,080,000 section 179 limit—however, bonus depreciation starts to phase out to 80% for the qualifying property put in service in 2023.
- A perpetual software license (hosted or on-premises)—along with the professional services needed to make it operational—qualifies for section 179.
- Any hardware will qualify for section 179.
Subscriptions vs. Purchases
Gustin points out that there are different interpretations for SAAS subscriptions, regarding their qualification for the Section 179 deduction. “For tax purposes,” he adds, “it’s important to consider the way the tax code views subscriptions and purchases.”
- If you pay monthly for your subscription, the fees will be expensed as they are paid. This arrangement is considered a subscription and thus treated as an operating expense, based on the payments made in that tax year.
- If you acquire your software through a subscription, the subscription costs are considered an operating expense. If you pay the entire subscription fee upfront, or finance a multi-year software subscription and the professional services required to allow the software to be operational, the cost is capitalized as a prepaid asset and amortized over the subscription term for financial accounting purposes. Example: A three-year subscription that costs $10,000 annually = a total of $30,000.
According to Gustin, “Financing a multi-year subscription can help companies justify the cost of a new POS solution, while still managing their budgets.” Using the above example, if a retail business obtains financing for the $30,000 over 36 months, the end user could deduct $10,000 of the $30,000 in the first year, regardless of when the acquisition takes place in the tax year. One advantage of financing multiple years of a software subscription instead of paying monthly: customers can deduct a full year of the subscription, as long as the financing contract begins before the end of 2022.
To learn more about financing options for your business, contact Eric Gustin of Byline Financial Group, at egustin@bylinefinancialgroup.com.
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