Section 179
What is the Section 179 Deduction?
Contrary to belief, Section Code 179 of the IRS Tax Code is not a complicated tax law.
This code allows businesses the ability to deduct the full purchase price of a qualifying equipment purchase in the year it was purchased or financed. That means if you purchase a piece of equipment for your business, you can deduct the full purchase price from your gross income. The US Goverment created this incentive to encourage small to medium sized businesses to invest in their companies. This even applies to many vehicles and is also known as the SUV Tax Loophole.
How it works.
Most businesses write off their equipment purchases over a period of time; known as depreciation. If you were to spend $75,000 on a piece of equipment and you wrote it off your taxes over 5 years; you would have a depreciation schedule of $15,000/year.
Under Section Code 179, the business owner can now write off the full purchase price of $75,000 in the year he/she purchased it. This tax code was established to help the small business owner purchase necessary equipment more often and spur the economy.
Limits of Section Code 179
As with all tax codes, there are limitations. The total amount that can be written off in one year is $250,000. There is also a limit to the total amount of the equipment purchased of $800,000. After $800,000, the deduction phases out dollar for dollar. This program truly is for the small business owner.
However, in 2009, if your business exceeds the $250,000 deduction you may still take a bonus depreciation of 50% of the amount that exceeds the limit. The balance not able to be written off the year of the purchase may be depreciated over time.
Who qualifies?
All businesses that purchase or finance less than $800,000 in qualifying business equipment should qualify for this deduction. The equipment must be placed into service before December 31, 2009.
Example:
| 2009 Equipment Purchase | $430,000 |
| 1st year write off | $250,000 |
| Bonus 1st year depreciation | $90,000 ($430,000 – $250,000 = $180,000 $180,000 x 50% = $90,000) |
| Normal 1st year depreciation | $18,000 (depreciation calculated at 5 years. $90,000 x 20% = $18,000) |
| Total 1st year deduction | $358,000 ($250,000+$90,000+$18,000+ $358,000) |
| Tax Savings | $125,300 (Assume a tax rate of 35%. $358,000 x .35 = $125,300. |
| Total Cost of the equipment | $304,700 ($430,000 less all tax deductions of $125,300) |
The following two sites will shed even more light on this Tax Code and have a list of qualifying equipment and free calculator:
www.irs.gov/formspubs/article/0,,id=177054,00.html
www.section179.org/section_179_deduction.html
As always, we recommend that you consult your tax advisor before making any purchases to ensure they qualify with the program.