Small businesses will be getting a permanent half-million-dollar tax break when they buy equipment like cars, computers and machinery. But tax pros say owners should crunch some numbers before claiming the big deduction.
An agreement that was reached in Congress earlier this month would give small companies a $500,000 annual deduction for equipment purchases. The so-called Section 179 deduction has been in limbo the past few years, with Congress often not agreeing until December to raise it from the $25,000 called for in the federal tax code.
The permanent $500,000 deduction is part of a tax package that also includes a higher deduction through 2019 for all companies that depreciate equipment purchases and a permanent break on research and development costs.
Here's what you need to know:
What is the Section 179 deduction?
The Section 179 deduction allows a small business to deduct upfront rather than depreciate over a number of years the cost of equipment like computers, vehicles, manufacturing and farm machinery and office furniture.
It can't be used for equipment like heating and air conditioning units that become part of a building.
Equipment has to be purchased and put into service by Dec. 31. So if you have a manufacturing machine delivered but it isn't assembled, up and running by the end of the year, you can't deduct it. You don't have to pay for the equipment by year-end; it's OK to buy it on credit and still take the full deduction.
If your company has lost money, you can carry over a portion of the deduction into the next year.
You can learn more about the deduction and how to claim it on your tax return from IRS Publication 946, "How to Depreciate Property," which is available on the IRS website (www.irs.gov).
It's also a good idea to discuss your plans with an accountant or tax attorney.
How you should I proceed?
Perhaps the greatest benefit of a permanent Section 179 deduction is that it allows businesses to do long-term financial planning. When accountants hold planning meetings with their business clients, they're often looking at revenue and income projections for three or four years, and they may even be looking back at the previous year.
So while it may be tempting to take the entire deduction in a given year, an accountant is likely to consider whether it makes more sense to depreciate a big purchase over a period of five to seven years so a company could save more money in the future, especially if it's likely to have a big revenue surge.
An owner whose income is down in the current year and isn't expecting a big tax bill might also want to think about delaying the purchase until the following year, says Jeffrey Berdahl, a certified public accountant with RLB Accountants in Allentown, Pa.
"You might be in a higher tax bracket next year," Berdahl says.
The tax bill also reinstates through 2019 what's called bonus depreciation, which allows companies of all sizes to depreciate half the cost of an equipment purchase. Bonus depreciation had expired at the end of 2014.
Small companies can use both the Section 179 deduction and bonus depreciation, up to a maximum of $2 million.
Do you really need it?
An expression accountants often use when they're talking about equipment purchases is: Don't let the tax tail wag the dog.
In other words, don't buy equipment your company doesn't really need.
You need to be sure the equipment you buy will bring in enough revenue to justify the investment. This is especially important if equipment was bought on credit — a company can still be paying down debt long after they got the tax break, says Martin Abo, an accountant and financial planner in Mount Laurel, N.J.
"You need to be able to say 'This thing is going to produce for me,' " Abo says.
Joyce Rosenberg is a business reporter for the Associated Press.