Helping Small Businesses - Section 179 Deduction

Most people think the Section 179 deduction is some arcane or complicated tax code.  It really isn't, as the following will show you. Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. Government to encourage businesses to buy equipment and invest in themselves.


Section 179 for 2011 at a glance:


2011 Deduction Limit - $500,000 (up from $250k previously). Good on new and used equipment, including new software.


2011 Credit Phase out on equipment purchases - $2 Million Dollars (up from $800k previously).


“Bonus” Depreciation - 100% (taken after the $500k deduction limit is reached). Note, bonus depreciation is only for new equipment. This can also be taken by businesses that exceed $2 million in capital equipment purchases.


Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example.)

Now, while it's true that this is better than no write off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it. In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting. 

Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease less than $2 million in new or used business equipment during tax year 2011 should qualify for the Section 179 Deduction.  If a business is unprofitable in 2011, and has no taxable income to use the deduction, that business can carry-forward the deduction to a year when the business is profitable.

What's the difference between Section 179 and Bonus Depreciation? 
The most important difference is both new and used equipment qualify for Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only. Bonus Depreciation is useful to very large businesses spending more than $2 million on new capital equipment in 2011.

When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business has no taxable profit in 2011 (the unprofitable business is allowed to carry the loss forward to future years).

The above is an overall, “simplified” view of the Section 179 Deduction for 2011. Please consult your tax adviser prior to implementing any strategies in this article.