With all the “Bah, humbug” talk of the so-called fiscal cliff and worry over whether tax increases will be coming in 2013, some small-business owners may have forgotten about a tax deduction provision that could help with this year’s tax bill.
Known as Section 179 Deduction in the tax code, it’s not sexy and has not been as widely highlighted as the coming changes in the estate taxes and long-term capital gains taxes. But it’s the part of the tax code that allows businesses to deduct the full purchase price of business-related equipment up to $139,000.
Next year, the write-off limit shrinks to $25,000 unless changes are made soon.
“We keep hearing tax rates are going to go up,” said Patti Asher, CPA and a Small Business Development Center consultant. “No one is saying, ‘Oh yeah, in addition to that you won’t be able to write off as much as you can now.’”
Just like holiday shoppers, some small-business owners might hit the stores to buy needed business equipment, including computers and software, in the final weeks of December to take advantage of the current tax code and maximize purchasing power.
“My advice to a business owner, if your business plan calls for investment in assets and you are planning on doing it in 2013, and you could use the tax deduction in 2012, then maybe you want to pull the decision into 2012,” said Espen Jansen, CPA managing principal at Padgett Business Services and SBDC consultant.
Section 179 primer
Taxes are never fun. But this year there is the continuing swirl of uncertainty around whether Congress will make last-minute changes to the Bush era tax cuts, which are set to expire at the end of December.
It has left small business owners wondering if they should spend now or wait. All of the changes together, if nothing is done in this 11th hour, will have a big impact on small businesses next year, Jansen said.
And while the past few years have been no holiday for small businesses dealing with last-minute changes or extensions to existing tax policies, this year’s fiscal cliff uncertainty has heightened the confusion and likely will result in deadline maneuvering.
“I think there is more drama this time around,” Jansen said. “The consequences could be so enormous.”
It is one reason why some small-business owners may hustle to take advantage of Section 179 tax provision before it gets reduced, said Chris Scovil, Stockman Kast Ryan + Co. tax manager.
“In 2010 and 2011 we’ve seen extension and expansion of some of these provisions,” Scovil said. “The difference this year, it’s not currently expected that they are going to extend those increased benefits — so, it’s more of a scramble this year than in prior years.”
But a lot of small-business owners haven’t thought much about Section 179, he said. Small-business owners buy equipment as they need it and turn over receipts to their accountants to figure out what to do. That’s why next year’s scheduled changes in the provision may warrant a second look at this year’s business equipment plan.
“We’ve have had the increased 179 benefit and bonus depreciation for so long, people are starting to take it for granted a little bit,” he said. “They may not realize to the extent to which these things are actually slated to go away.”
Equipment write-offs have been on the books for years. When a business buys equipment it gets to write off a little at a time through depreciation. For example, a business could write off $10,000 a year for five years on a $50,000 machine. Those more typical depreciation rules are not slated to change in 2013.
Meanwhile, Section 179 is one of the few incentives that actually helped small businesses.
It was designed to stimulate buying. Historically, the deduction limitation had been set at about $25,000. About 10 years ago, the deduction limitation started going up in an effort to encourage small businesses to invest in equipment, Scovil said.
The idea was that if small business could write off more in equipment, they might buy more and invest in their business. Scovil believes it has worked.
“If you have $200,000 in income from sales and $139,000 deduction in Section 179, you offset them — it means you will pay tax on the net,” Scovil said.
That is huge for a small business, said Todd DeRemus, owner of Blackfoot Pavement Maintenance in Woodland Park.
“It does affect my bottom line,” he said. “If I can go and buy a paver for $80,000 and write that off, it does affect the bottom line.”
Jon Thomas, co-owner of Janska Clothing, said he’s not worried about his taxes this year. It is next year when changes go into effect that the impact will make a difference. But what gets him, he said, is that Congress could still act in the coming weeks to help small-business owners and the middle class.
“What I’ve thought about is that it is inconceivable to me that the Republican legislators are unwilling to go ahead and give tax breaks to the middle class — they want to the breaks to go to people over $250,000,” he said.
“The middle class is truly being held hostage.”
Plan for the now
Even in these last weeks of the 2012 tax season, there are many questions, Jansen said. Some small-business owners will be weighing whether they should buy now and write off the equipment in 2012. It is difficult for a tax adviser to guide clients, Jansen said.
“I would say we can advise with the information that we know and have today,” he said. “We expect in the accounting community, and clients should expect, that things will change at the last minute.”
As of now, business owners will not be able to write off as much in equipment purchases next year. The deduction reverts back to pre-2003.
“The thing to remember is equipment is still expensive and if it doesn’t make business sense for you to have the equipment, you don’t want to spend money just to get the tax deduction,” Scovil said.
Section 179 and Bonus Depreciation
All businesses that purchase new or used business equipment during the 2012 tax year qualify for deductions.
The equipment must be placed in service between Jan. 1 and Dec. 31, 2012.
There is a limit. The deduction begins to phase out dollar-for-dollar after $560,000 spent by the business.
In 2012, there is a 50 percent bonus depreciation provision, which can be used for those businesses that spend over the $560,000 limit on new equipment. That bonus goes away in 2013.
Examples of deductible business expenses
Equipment (machines, etc) purchased for business use
Tangible personal property used in business
Business vehicles with a gross vehicle weight in excess of 6,000 pounds
Computer, off the shelf software
Property attached to your building that is not a structural component of the building like a printing press, large manufacturing tools and equipment.