Successfully starting and running a small business can be a very tough road. From finding the right employees and staying one step ahead of local and federal regulations to generating marketing collateral and meaningful sales, each day presents new challenges.
One of the toughest obstacles for any new business is finding the capital required to make the appropriate investments your enterprise needs to position itself for the long-term – and to get to the point where it finally becomes profitable.
In the case of certain major expense outlays, Uncle Sam can help through what is known as a Section 179 election. Typically, major expenses such as machinery and equipment are required to be depreciated over a term of years dictated by the IRS to approximate the useful life of the purchase.
If your small business spends $7,000 on equipment the IRS considers to be 7-year property, you can take a $1.000 ($7,000 cost divided by 7 years) depreciation deduction each year for seven years. If the business is in the 25% tax bracket, the depreciation deduction saves $250 in taxes annually.
However, certain expenses qualify for the Section 179 expense election. If so, the business can choose (or, in IRS-speak, “elect”) to immediately expense (rather than depreciate) the purchase. Consequently, the entire $7,000 purchase could be written off this year. For a taxpayer in the 25% tax bracket, the immediate tax savings generated by the Section 179 election are $1,750.
What Purchases Qualify for Section 179 Expensing?
For the vast majority of small businesses, the key Section 179 opportunity areas are tangible (i.e., you can see it, you can touch it) personal property. Examples include not only machinery and equipment but also office equipment, including furniture, and off-the-shelf software.
When Can You Elect to Take the Section 179 Deduction?
You are eligible to take the Section 179 expense for the tax year in which you first put the item(s) purchased in service. Said another way, you can choose to take the Section 179 election when you file your tax return (Form 4562) for the year in which you purchased (not received via a gift) an item which you began to use in your business.
Are There Any Limits to the Section 179 Deduction?
The following limits to the Section 179 deduction apply:
- Dollar Maximum
- Business Income
- Percentage Use
Section 179 Maximum Dollar Limit
The maximum dollar amount you can expense via Section 179 varies by tax year and is currently $500,000. Regardless of the amount you buy and put into service during 2011, you can’t expense more than the 2011 limit of $500,000. Furthermore, if you invest more than $2,000,000, you won’t be able to expense anything over that amount via Section 179.
The larger Section 179 tax benefit is set to expire on December 31st, 2011 and will be reduced to a $125,000 dollar limit and a $500,000 investment limit beginning tax year 2012. So if you have been debating about buying that computer equipment, you may want to go make that purchase today!
Section 179 Business Income Limit
The amount of your Section 179 expense election is further limited to the amount of net income (profit) you have from your businesses. So if using all of your Section 179 expenses would put your company in a loss position, you can only elect to expense an amount equal to what it would take to make your businesses break-even. Any unused Section 179 amount can be carried forward indefinitely and used to offset future year’s business income.
Section 179 Percentage Use Limit
Certain types of equipment, most notably computers used in home offices, are used partially for business purposes and partially for personal benefit. Provided you use the item at least 50% for business, you can still take the Section 179 expense. However, the amount of the Section 179 expense election is limited to the percentage of time the item is used for business. So if your new $1,000 laptop is used 75% for business and 25% for video games and looking at the weather in Ann Arbor, Michigan, you can expense $750.
Make sure you take the time to keep good records throughout the year. You’re sure to enjoy the tax savings, helping keep your business on the right track and don’t forget, TurboTax easily guides you through Section 179 deductions.