The Tax Benefits of Section 179 Deductions for Contractors

When running a construction or remodeling business, it’s important to understand tax law as it relates to your operations. One important thing to understand is the benefit of using Section 179 deductions, which allows you to deduct the purchase of qualifying equipment and machinery in the same tax year it’s put into use as opposed to spreading the cost out over multiple years.

How Contractors Benefit From Section 179 Deductions

Making use of Section 179 deductions can be advantageous for contractors who use higher-cost equipment in their business. Whether you use trailers, heavy machinery or work trucks in your operation, eligible purchases can be entirely deducted in the year they start being used instead of being depreciated over time

This can be greatly beneficial from a tax perspective. Let’s say for example your business is having an especially profitable year pushing you into a higher tax bracket than in previous years. Opting to buy equipment within that tax year and leveraging the Section 179 deduction to deduct the full amount of those purchases could help keep you from going over that threshold.
This could potentially reduce your taxes by thousands of dollars simply by optimizing the timing of the purchase of equipment that you would eventually need to purchase at some point anyway.

Consideration of Deduction Limits

Before investing in equipment, it’s crucial to understand that the IRS imposes restrictions on the deduction amount allowed under Section 179. For the 2024 tax year, the deduction cap stands at $1,050,000 with a reduction kicking in at $2,620,000 for equipment acquisitions.

To be eligible for the Section 179 deduction, the equipment must serve a business purpose. Examples could include items like forklifts, scissor lifts, roll-off dumpsters, scaffolding and roofing safety hoists.

Prior to any purchase decision, seeking guidance from a trusted tax advisor is highly recommended to ensure compliance with Section 179 regulations as tax laws change from year to year. Professional advice can not only guarantee adherence to tax law, but also help ensure the timing of such transactions are beneficial to your specific tax situation.

Other Section 179 Deduction Considerations

As a contractor, you may also want to consider the benefits of financing your equipment purchases as opposed to purchasing outright.

Because purchasing higher-cost equipment can be a real drain on your bank account, opting to finance the equipment may allow you to better manage your cash flow effectively while still getting the benefits of the write-off.

Again, it’s recommended that you consult with a tax professional who understands construction accounting so that they can provide you with recommendations that are best suited to your specific situation.

Maintain Detailed Records

Any time you opt to take advantage of the tax advantages available to you as a contractor, it is imperative to keep good records.

For Section 179 purchases, this would include documentation such as invoices, purchase agreements and other pertinent paperwork related to equipment procurement in order to substantiate Section 179 deductions. It’s also important to keep documentation on how this equipment is used in your business operation.

Failure to do so could have costly repercussions in the event of an audit which would almost certainly outweigh any tax benefit you may have gained from the use of this strategy in the first place.

Conclusion

In summary by making use of Section 179 deductions construction contractors can decrease their tax obligations free up capital for investments and position their companies for increased tax savings when tax season arrives.

At Stream Construction Accounting, we help contractors leverage tax advantages like these on a daily basis. If you’d like to discuss how we can help you maximize your tax savings through tax planning, tax-optimized bookkeeping or tax preparation and filing, feel free to reach out to us today!

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. We assume upon the information contained herein.