Congress Sweetens the Deal

If you’ve been waiting to buy new equipment, you might want to re-crunch the numbers before the end of the year to take advantage of the latest tax law changes

Uncle Sam wants you … to buy things for your business. Big things. And to motivate you to spend money on equipment, newly revised Section 179 of the federal tax code allows you to write off 100 percent of major capital expenditures immediately, putting quick cash in your company’s pocket.

Section 179 has been around for a few years, but thanks to the Small Business Jobs Act, signed into law in September, it has been extended and expanded. Before passage of the act (officially the Small Business Jobs and Credit Act of 2010), 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.

But now, Section 179 allows you to buy qualifying equipment and expense 100 percent of the purchase in the same year. This means you can deduct the cost immediately rather than depreciate it over time. The new law raises the amount you can deduct from $250,000 to $500,000.

It also changes the “phase-out threshold.” In the earlier provisions, the $250,000 expensing was phased out if you bought 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 cover the 2010 and 2011 tax years.

Immediate infusion

With these larger tax deductions for equipment, software and vehicles, Section 179 can mean dollars going into your bank account, giving your bottom line a substantial boost this year. As long as the purchases are less than your profits, you can take up to the full amount of the Section 179 deduction this year, if you make your purchases by Dec. 31. The deduction applies even if you finance or lease the equipment, making only a small down payment.

Leasing or financing equipment with the Section 179 deduction in mind can be a savvy strategy because it can significantly improve cash flow and profits. The amount you save in taxes could actually exceed the amount you pay on the equipment in 2010.

What qualifies?

The purpose of Section 179 was to encourage businesses to buy equipment sooner and so stimulate the economy by increasing orders to the nation’s factories and getting people back to work. The range of qualifying items is broad, and includes:

• Machinery and equipment.

• Business vehicles with a gross vehicle weight greater than 6,000 pounds.

• Computers and software.

• Office furniture and equipment.

• Property attached to a building that is not a structural component (such as large manufacturing tools and equipment).

• Equipment purchased for both business and personal use. (Here the size of the deduction is based on the percentage of time the equipment is used for business.)

How Section 179 works

Here are three examples of how the new Section 179 could affect your business:

Example 1: Suppose your company expects a $200,000 profit for 2010 as reported on Schedule C of your federal tax return, and that you buy or lease qualified equipment worth $150,000 before the end of the year. You would be able to deduct that entire $150,000 from your 2010 taxable income, reducing your profit for tax purposes to $50,000. That means a significant 2010 tax savings.

Example 2: Suppose your 2010 Schedule C profit is $50,000 and you buy or lease business equipment costing $55,000. You would be able to deduct $50,000 of the purchase price from 2010 taxable income under Section 179, reducing your net profit for tax purposes to zero. For the remaining $5,000 of the equipment cost, you could either take depreciation over the useful life of the equipment, or carry it over to 2011 and fully deduct it under Section 179 — as long as you have enough profit in that year to absorb the $5,000 expense.

Example 3: Suppose you operate at a loss in 2010. In that event, Section 179 will not benefit you for that year. If again you made $55,000 in equipment purchases, you could depreciate that amount over time, or carry it over and take the Section 179 deduction for 2011, provided your profit in that year covers that amount.

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 benefiting from the improved Section 179. Make sure it’s going to benefit you — and then go shopping.



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