You and IRS Section 179 - BusinessWatch
How you can deduct the full cost of expensive equipment purchased this year.
Bruce Bryen, CPA
Only a couple of months are left in 2010 for small businesses to save money by taking advantage of the accelerated deductions allowed under Section 179 of the IRS tax code. As in 2009, for the taxable year ending December 31, 2010, Congress granted small businesses the ability to deduct the full purchase price of qualifying business equipment from their gross income (up to $250,000).
This change in the tax code has allowed businesses to enjoy a tax deduction for equipment acquisition much faster than in past years. What it means is that you can buy the equipment, finance it so that payments do not begin until some time after the acquisition, and take the tax deduction in 2010. However, after 2010, these higher limits will likely return to pre-2009 levels of $25,000. Therefore, purchasing in 2010 would be an advantage compared to a large capital expenditure for equipment in 2011 because of the higher one-time expensing ability.
Why Section 179?
The intent of Section 179, when extended in 2009 as part of the American Recovery and Reinvestment Act, was to stimulate the economy by giving business owners an incentive to invest in their businesses. Through the end of 2010, a direct tax deduction of $250,000 is allowed for companies that buy and place in service equipment for business use. This means, for example, that if a company grossed $250,000 of net income for the year and spent $250,000 on equipment in that same year, the company could write down net income by $250,000 and owe no tax for the tax year ending December 31, 2010.
For businesses in the top tax bracket, assuming the deduction flows through to the owner(s), such as for an S corporation where shareholders had basis, or LLCs and LLPs, an owner can reduce net business income by an amount in the range of 50% of that deduction. For example, if your net income was $250,000 before the accelerated deduction, your tax savings could be $125,000 ($250,000/50%). There are limitations so that you cannot report income less than zero using the accelerated write-off method.
Taking Advantage of Section 179 in 2011
Based on the potential tax liability and the use of those funds, it may still pay to take advantage of the Section 179 election in 2011 even though the total dollar deduction will be only $25,000. Remember that normal depreciation, known as the Modified Accelerated Cost Recovery System (MACRS), allows a very fast depreciation write-off, and those expenses are not subject to positive or negative earnings standards unlike the Section 179 election.
If you understand present value guidelines and have use for the deferred tax that will earn money for you, such as paying down high-interest rate debt, improving efficiency in your business, hiring additional people, or improving technology for improved turnaround time and better consistency, the Section 179 election may be an excellent tool to use in 2011 and beyond.
Retain a CPA with expertise in tax and cash flow analysis. It can be a one-time consultation, and it does not have to interfere with your current CPA who prepares the tax returns and financial statements for your business. The cost of the one-time charge can pay enormous dividends. In 2011, the ability to get a deduction of $25,000 can save $12,500 or more in taxes, depending on the state in which you operate your business and that state’s tax rate.
Who and What Qualifies for Section 179?
Any business that purchases or finances less than $800,000 in business equipment should qualify for the Section 179 deduction. The equipment, vehicle, and/or software must be used for business purposes more than 50% of the time to qualify. The equipment purchased must be in service between January 1, 2010 and December 31, 2010.
Qualifying equipment includes business vehicles with a gross vehicle weight in excess of 6,000 pounds, computers, computer software (off the shelf), office furniture, office equipment, and property that is attached to the office building that is not a structural component of the building (ie, large manufacturing tools and equipment).
Businesses can also lease equipment and still take full advantage of the Section 179 deduction. In fact, using this strategy helps many businesses improve cash flow and profits. With a non-tax capital lease, a business can acquire and write off $250,000 worth of equipment this year, without paying the amount in full this year. The amount saved in taxes can actually exceed the total of the payments made in the first year.
A qualified equipment finance lender can structure the equipment lease or equipment financing agreement to help a business take full advantage of the benefits of Section 179. This deduction presents small businesses with a great opportunity to maximize their purchasing power. For more information, visit www.section179.org
About the Author
Bruce Bryen, CPA
Bryen & Bryen LLP
Certified Public Accountants
Marlton, New Jersey
856-985-8550 Ext 112