A provision in the omnibus spending bill passed by Congress and signed by President Obama on December 18, 2015, makes it more affordable for small businesses to buy up to $500,000 worth of equipment per year.
The spending bill makes permanent the Section 179 deduction, a formerly temporary tax break that allows a business to deduct, for the current tax year, the full purchase price of qualifying financed or leased equipment and off-the-shelf software, up to a cap of $500,000 per year. According to the New York Times, the provision has the effect of lowering a business’ taxable profits, perhaps significantly.
Small businesses have always been allowed to deduct asset depreciation, but Section 179 lets a business deduct an item’s total depreciation up front, according to Benzinga.com, a financial media outlet. For example, in the past, a $4,000 computer would provide a $400 to $800 per year depreciation deduction over a six-year period, the article noted. But with Section 179, small businesses can deduct the full cost of the computer, so long as they do not exceed the $500,000 cap. This would, in turn, reduce a company’s taxable profit, but the deduction cannot be greater than a company’s net income.
The deduction is limited to small and midsize companies. It starts to phase out when a small business spends more than $2 million per year on qualifying purchases, and it is eliminated for businesses that spend more than $2.5 million.
Tanya Ouellette, an accountant with Raiche & Company in Dover, New Hampshire, told the Times that she believes that all independent businesses, no matter how small, should consider taking advantage of the 179 deduction. “It doesn’t have to be a huge piece of equipment,” she said. “I tell my clients, ‘If you bought a new Apple laptop, we’re going to take a 179 on that.’”
At one point, the Section 179 deduction had an annual cap of $25,000 or less, the Times article reported. In 2003, Congress temporarily raised the limit to $100,000, and in 2008 it increased the cap again to $250,000. In 2010, hoping to stimulate more spending, Congress increased the limit to $500,000, an amount that would allow businesses to use the deduction toward such expensive items as factory machinery and trucks. Now, with the provision in the omnibus spending bill, Section 179 is permanent.