As the 2016 tax year draws to a close, it’s time to start evaluating your tax liability. Part of the IRS Code was enacted to help small businesses by allowing them to take a depreciation deduction for certain assets (capital expenditures) in one year, rather than depreciating them over a longer period of time.
Taking a deduction on an asset in its first year is called a “Section 179 deduction.” It’s beneficial to a small business owner to take the full deduction for the cost of the item immediately, rather than being required to spread out the deduction over the item’s useful life.
By allowing businesses to deduct the full amount of the purchase price of equipment, Section 179 is a fantastic incentive for businesses to purchase, finance or lease equipment this year.
Ordinary and necessary expenses can be deducted, like pens and pads of paper. The useful life of a pen is a month and a pad of paper is a week or so. Their useful life is short, so they are considered expenses.
A conference table isn’t like a pen in that way, though. The cost of the table is high and the useful life is longer, so it has to be set up and depreciated.
Code Section 179 allows us to write the table off like it’s a pen for one year. Computers or printers also have a relatively high cost and long useful life. That’s the type of item that Section 179 is for.
You can buy these items in December and write them off in the same year. However, there are some restrictions to keep in mind:
- 2016 deduction limit is $500,000. This deduction is good on new and used equipment, as well as off-the-shelf software. This limit is only good for 2016, and the equipment must be financed or purchased and put into service by end of day, Dec. 31, 2016.
- 2016 spending cap on equipment purchases is $2,000,000. This is the maximum amount that can be spent on equipment before the Section 179 deduction available to your company begins to be reduced on a dollar-for-dollar basis. This spending cap makes Section 179 a true small business tax incentive.
- Bonus depreciation is 50% for 2016. Bonus depreciation is generally taken after the Section 179 spending cap is reached. Note: Bonus depreciation is available for new equipment only.
As a general rule, if it’s a larger purchase for long-term use, it probably qualifies for Section 179 depreciation. If you have further questions about Section 179 or other aspects of your taxes, give us a call!