In the past few years, most small business owners have probably heard the term “Section 179” from peers, clients or partners. Some may have even explored the tax benefit option, but many others are likely unfamiliar or confused how the deduction works. Unfortunately, if small business owners do not learn about it soon, they could miss out on saving hundreds of thousands of dollars. In 2014, Section 179 tax benefits will be drastically reduced if no other governmental action is taken. Luckily, the details are relatively straightforward. By reading on, small business owners should be able to determine what they have to do to benefit.
In a nutshell, Section 179 of the tax code allows deductions of up to $500,000 for new and used equipment purchases.
Businesses have traditionally been able to write off small amounts of equipment purchases each year due to price depreciation, according to the IRS. However, recent changes to the code have allowed businesses to write off the entire cost the year it was purchased. Rather than wait many years for depreciation to build, the measure gives owners immediate access to their working capital, which they can then use to reinvest in their businesses.
Benefits are not limited to purchasing, but equipment financing as well.
A recovery initiative
Back in 2007, Section 179 offered deductions of up to $125,000 on qualifying equipment under $500,000. The benefit, while sizable, was scheduled to decrease in coming years. The following year, however, the economy took a turn for the worst, prompting congress to pass the Economic Stimulus Act of 2008. Among its many provisions was legislation that increased the max deductions of Section 179 to $250,000 and the max purchase amount to $800,000. Furthermore, purchases made above the limit became eligible for a deduction totaling 50 percent of the cost.
Since 2008, annual legislation has extended these benefits. In 2010 deductible amounts grew even higher. The deduction limit increased to $500,000 and the maximum purchase amount increased to $2,000,000. The amounts have remained in place since, but are scheduled to end on Jan. 1, 2014, meaning businesses will have to move quickly to finance equipment in the tax year.
What is covered?
There are specifications as to what equipment can and cannot be deducted. One requirement is that equipment must be used for business more than 50 percent of the time. The amount of time it is used leisurely needs to be subtracted from the benefit. For example, if somebody uses the company truck recreationally on weekends then about 20 percent of its total use would be for non-business purposes. Under Section 179, only 80 percent of the truck cost is eligible for deduction.
If you’re a small business owner who is interested in writing off a purchase, be sure to investigate if your desired equipment will be covered. Owners who want to take advantage of the clause, but are unable to afford an upfront purchase, have the option to lease their equipment. National Funding will finance new or used equipment in almost every industry, helping businesses of all budget sizes take advantage of the tax benefit.