If your small business purchases equipment and other property, make sure you ask your accountant about Section 179 deductions.
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For tax purposes, most large purchases are depreciated over several years. In other words, each year you can only use a portion of the total cost to offset your revenues and lower your taxes.
Wouldn't it be nice if you could expense the entire thing in one fell swoop and take a major chunk out of your taxes this year instead of writing off just a fraction of the expense each year?
That's exactly what a Section 179 deduction lets you do.
In the old days, a Section 179 deduction was limited to $25,000. But changes in the tax law have greatly increased how much you can write off. That's because lawmakers increased the Section 179 deduction amount to stimulate the economy. The intent was to encourage businesses to invest in new equipment sooner.
Regardless of what motivated the changes, it's good news for you as a small business owner.
For purchases made in 2006, your small business can expense $108,000 in capital expenditures up to an overall investment limit of $430,000. As we move forward into 2007 and beyond, those numbers are only getting bigger, due to some inflation indexing that comes into play.
You have to opt-in to take a Section 179 deduction. It isn't automatic. You make the election on an item-by-item basis using Form 4562.
What purchases can you deduct? The equipment you buy can be new or pre-owned. Business software costs also qualify.
Even large sport utility vehicles can be deducted, although that benefit has been curtailed quite a bit recently. If you've seen a lot of small business owners driving Humvees around, there's a good chance those vehicles were fully deducted via a Section 179 deduction.
However, there are some exclusions to what can be expensed via Section 179. Consult with your accountant to make sure your purchases qualify.
Unfortunately, you cannot apply the Section 179 deduction to purchases you've made in prior years. The Section 179 election has to be made in the tax year the property is first placed in service.
If you don't use your entire Section 179 deduction this year, you can't rollover the excess to next year. It's a use-it-or-lose-it small business tax deduction.
If you do hit the maximum Section 179 deduction amount, any overage for a purchase must be depreciated. In addition, you cannot deduct more than your income - in other words, you cannot use Section 179 to create a taxable loss.
Remember, the Section 179 deduction isn't automatic. Taxpayers who want to take the deduction must elect to do so.
This is one of the best small business tax deductions around. For more information on Section 179 deductions, read Chapter Two of IRS Publication 946: How To Depreciate Property.