The Section 179 deduction is designed to save small-business owners money and encourage them to invest in their ventures. Under this section of the federal tax code, business owners are allowed to write off the entire cost of many assets in the same year they were purchased instead of writing them off incrementally as the equipment ages.
Here’s how it works:
Most new and used equipment is eligible for the deduction, as long as it’s used at least 50 percent of the time for business purposes. The IRS allows entrepreneurs to apply this rule to a wide range of items, from computers and software to machinery and office furniture.
Most small-business owners are eligible to write off up to $500,000 worth of equipment and qualifying vehicles in the 2013 tax year. For any new equipment purchases that exceed the $500,000 mark the business owner may claim something called bonus depreciation, which allows a deduction of 50 percent of the cost of the purchases.
Because Section 179 is truly designed to help small- and medium-sized businesses, a company that purchases more than $2 million worth of equipment in the 2013 tax year will lose the full benefit of the deductions at the rate of one less dollar allowed for every dollar spent beyond $2 million.
Section 179 deductions are not allowed to exceed a business’s taxable income and can’t be taken in a year a business isn’t profitable. In that case the 50 percent bonus depreciation on equipment purchases applies instead.
Essential to Tax Planning
Gary Milkwick, CPA and vice president of 1800Accountant.com, says the Section 179 deduction is an important part of the tax planning process for his small-business clients.
“Particularly in the third and fourth quarters of the year, I always ask clients if and when they plan on purchasing new equipment, vehicles, or other assets,” Milkwick says. “The response is often that they are planning on purchasing some type of equipment in the next few months. Since Section 179 allows these purchases to be immediately depreciated, making sure a purchase happens in December of one year rather than January of the next year can mean a tax deduction of thousands or even tens of thousands of dollars.”
The Section 179 deduction was created to encourage small businesses to invest in themselves by allowing a full write-off of most equipment purchases. Congress has raised the deduction limits in the past few years and extended them through 2013 with the American Taxpayer Relief Act of 2012, the legislation that avoided the so-called fiscal cliff. Milkwick says that is why small-business owners should sit down with their tax professionals and discuss this deduction.
“Since the higher limits for Section 179 have been extended for 2013, this could be a good year to accelerate purchases,” Milkwick says.