If you are thinking of waiting to purchase new ERP software for 2013, DON’T! The tax deductions available in 2012 on ERP hardware and software purchases are too good to pass up.
IRS Section 179 is a great way to save on your cash outlays when you make ERP system hardware or software investments. Check out the investment incentives offered in the IRS (Internal Revenue Service) Section 179 that are designed to stimulate economic activity by saving cash for small and mid-sized companies in the US. Available through the end of 2012, the IRS is offering a big tax deduction package for hardware and off-the-shelf software costs, whether they are outright cash purchases, investments financed with a loan, or purchases through a lease agreement.
Here are the specifics: In 2012 your company is allowed to deduct 100% of your investment costs up to $139,000 as an expense from net taxable income. This deduction makes your investment proposal much more achievable and attractive because it creates a significant and real cash outlay discount on your accounting system purchase.
Here’s an example: Let’s assume that your company plans to spend at least $ 139,000 on new accounting software, and that your company is in the 36% tax bracket. Under Section 179, your tax obligation to the IRS would be reduced by $ 50,040 ($ 139,000* .36), thereby lowering your true net cash investment costs to $88,960! In addition, if you buy hardware also, and invest more than $ 139,000 (up to $ 560,000), then you are also allowed an increased depreciation bonus deduction on any equipment purchased! This bonus deduction is equal to 50% of the difference between the actual purchase price (up to $560,000) and the $ 139,000. This additional depreciation expense bonus further increases that cash discount for your company, thereby lowering even further your net out-of-pocket cash costs of your investment.
Here’s a second example: Assume that instead your company decides to spend $ 200,000 on new ERP servers, computers, and printers, and that your company still operates in the 36% tax bracket. In this case, you would still get the $ 139,000 expense in the first year, plus a 50% additional depreciation bonus in the first year of $ 30,500 ($200,000-139,000), and you still get the normal IRS allowable first year depreciation on the remaining amount (20% of $ 30,500) =$ 6,100. These three items add up to a total first year allowable expense deduction of $ 175,600, which will result in a total first year tax savings of $ 63,216. This $63,216 total is a cash discount your company would get from investing in new ERP infrastructure in 2012.
This tax saving would reduce your company’s net cash or after-tax investment costs to a total cash outlay costs of $ 136,874, which is much less than the $200,000 original investment. Further, it is important to consider ERP related investments before the end of 2012 because the US Congress is currently actively thinking about “cleaning up” the tax code and closing down what they feel are unnecessary loopholes and incentives! A final interesting note is that if your investment exceeds the limit of $ 560,000, then this first year deduction (the $ 139,000) is reduced by one dollar for each dollar spent over the $ 560,000. The IRS built in this declining deduction to make this an incentive more for small, medium, or smaller large sized companies. Also, if you do not happen to have a tax obligation this year, then just carry the depreciation bonus forward to a future year! As always, you should thoroughly review the IRS Code Section 179 and get confirmation from your tax professional to make sure that the specifics of this incentive apply to your purchase.
Algorithm is not a tax advice expert. Information contained within this website is not intended to be tax advice. Before making tax or business decisions, please consult your Accountant directly.