Uncle Sam wants you … to buy things. Big things. And to motivate you to spend money on equipment, Section 179 of the federal tax code allows businesses to write off capital expenditures immediately, putting quick cash in a company’s coffers.
That’s nothing new. Section 179 has been around for a few years. But thanks to the Small Business Jobs Act, which was recently signed into law, Section 179 has been extended and expanded.
Prior to the passage of the act, which is officially “The Small Business Jobs and Credit Act of 2010 (H.R. 5279),” the future of Section 179 was unclear. Its benefits and deductions were set to expire this year and, almost nine months into it, there was no indication it would be renewed.
WHAT’S CHANGED
Section 179 allows businesses that purchase qualifying property to expense these items in the year of purchase. This means equipment can be deducted immediately rather than depreciated over time. Thanks to the Small Business Jobs Act, the limits of Section 179 were raised from $250,000 to $500,000.
The new law also changes the “phase-out threshold.” In the earlier provisions, the $250,000 expensing was phased out if the taxpayer has purchased more than $800,000 in qualifying property for that year. Congress changed the law so the phase-out begins at $2 million. All of the changes are for both the 2010 and 2011 tax years.
With these new increases in tax deductions for equipment, software and vehicles, Section 179 can result in positive dollars being deposited in a company’s bank account, giving a substantial boost to its bottom line this year. As long as the purchases are less than the business’ profits, the Section 179 deduction can be taken this year. And it’s not necessary to shell out huge amounts of cash to qualify. If a company finances or leases equipment, it can take the entire deduction this year, while only paying out a small portion of the total cost of the equipment.
Leasing equipment with the Section 179 deduction in mind can be a savvy financial strategy because it can significantly improve cash flow and profits. Leasing still allows a company to take full advantage of the Section 179 deduction, while making manageable payments. By leasing, a business can acquire and write off up to $500,000 worth of equipment this year, without actually spending $500,000 this year.
The same applies to financing equipment. You can deduct the full price of the equipment without paying the full amount this year. In fact, the amount saved in taxes can exceed the payments, turning the deduction into profit.
WHAT COUNTS
Section 179 was enhanced to make purchasing equipment during this calendar year financially attractive, which is designed to have a direct positive impact on the U.S. economy. The type of equipment that qualifies is broad, and includes
• Equipment (machines, etc.) purchased for business use.
• Business vehicles with a gross vehicle weight in excess of 6,000 pounds.
• Computers.
• Computer software.
• Office furniture.
• Office equipment.
• Property attached to a building that is not a structural component of the building (e.g.: large manufacturing tools and equipment).
• Partial business use (equipment purchased for both business and personal use). The deduction will be based on the percentage of time the equipment is used for business.
HOW SECTION 179 WORKS
Example 1: If a company expects its 2010 business profit, as reported on Schedule C, to be $200,000, and then purchases, finances or leases a $150,000 piece of equipment before the end of the year, the Section 179 deduction will reduce that profit from $200,000 to $50,000. That is a significant reduction in taxable profits.
Example 2: If the predicted 2010 Schedule C profit is $50,000 and business equipment purchased, financed or leased adds up to $55,000, the full $55,000 cannot be taken as a Section 179 deduction. However, a Section 179 deduction for $50,000 could be taken, reducing the profit to zero. The remaining $5,000 can either be depreciated over the useful life of the property, or it can be carried over to the next year and fully deducted as a Section 179 deduction, provided there is enough profit to absorb the $5,000 expense.
Example 3: If a business is operating at a loss, Section 179 will not benefit that business this year. For example, if Schedule C shows a loss of $20,000 and capital purchases were $55,000, no Section 179 deduction is allowed. The $55,000 can be depreciated or it can be carried over and the business can take the Section 179 deduction in the future if it shows enough profit.
SEEK PROFESSIONAL ADVICE
Of course, as with any tax matter, consult with an accountant or tax advisor before jumping in and making significant capital expenditure in hopes of benefitting from the new, improved Section 179. Make sure it’s going to benefit you — and then go shopping.
