500K Reasons to Love the Tax Code: Section 179
Tax Season. If you’re a small business this can be a dark time of year, the time of year when you finally have to take a look at those receipts and figure out what’s deductible. Fortunately for small businesses across the United States, the ceiling for those deductions has been set pretty high for the 2015 and 2016 tax years. And there’s Section 179.
Section 179 is part of the U.S. tax code requiring yearly Congressional review and approval and, yes, that’s just as boring and bureaucratic as it sounds. But there’s nothing boring about a $500,000 tax deduction! That’s right, Congress recently reauthorized the Section 179 tax deduction and the limit is $500,000 for tax years 2015 and 2016—a huge change from its sad $25,000 low in 2014. So, get out your calculators and a scratch pad or nudge your accountants because there may be some greenbacks coming your way (or at least fewer going the other way!).
What is Section 179? Basically, it became part of the Stimulus Bill that was passed after the financial crisis, written specifically to help small- and medium-sized businesses. Until very recently, Section 179 had to be reauthorized by Congress every year, changing or maintaining the deduction. Thankfully for small businesses, the amount for years 2015 and 2016 is being maintained at $500,000, and in December 2015, Congress made that deduction permanent. Much of the credit for this high limit goes to the lobbying efforts of the National Federation of Independent Business (NFIB), which worked continuously to get the deduction re-authorized. The fact that it continues to be available is a big help for small businesses that made, or are planning to make, investments in their businesses, because it caps those at $2,000,000 for 2010 through 2015. And, frankly, if you’re spending more than that, congratulations, you’re a big business now!
The best part of the Section 179 deduction is that it allows small businesses to deduct the full purchase amount of qualifying equipment in the given year. Before Section 179, you’d have to depreciate the deduction over some number of years. For example, if you bought a new computer system for your business that cost $10,000, previously, you might have had to file using a 5-year depreciation schedule with a $2K deduction per year. Now, under Section 179, you can deduct the full purchase price of the qualifying equipment in the year you purchased it—which is really when you need the deduction the most, since you just spent a whole bunch of money. No more confusing depreciation schedules delaying your deductions!
Another benefit of Section 179 is that equipment that’s “new to you” qualifies for the deduction. So, if you buy used equipment because you’re a scrappy new venture or if you’re just trying to save some pennies, you can still take the Section 179 deduction. This is especially helpful for our friends in the restaurant industry, where a lot of used equipment is purchased from existing or closing businesses.
What kind of purchases qualify? Well, this is a bit trickier but, per the folks at the nonprofit advocacy group Section179.org, who have worked on getting the info out there, the following is a good guideline:
- Equipment (machines, etc.) purchased for business use
- Tangible personal property used for business
- Business Vehicles with a gross vehicle weight in excess of 6,000 lbs (Section 179 Vehicle Deductions)
- Computer “Off-the-Shelf” Software
- Office Furniture
- Office Equipment
- Property attached to your building that is not a structural component of the building (e.g.: a printing press, large manufacturing tools or equipment)
- Partial Business-Use Equipment (that is, equipment purchased for business and personal use, generally, deducted based on the percentage of time the equipment is used for business purposes)
And, there’s even a handy calculator to give you an idea of what the savings from all those deductions might look like.
So, whether you do your own taxes or you have a tax specialist taking care of them for you, you may want to consider deducting those big ticket items you’ve purchased for the 2015 tax year.