Is your business in need of new equipment, but you don’t know when the right time is for such a large purchase? Even with the many expenses that occur during the busy holiday season, now may be a better time than you think. Under the Section 179 IRS tax code, you may be able to deduct the full purchase price of qualifying equipment from your gross income when you buy or lease before December 31, 2016.
WHAT IS SECTION 179?
In an effort to encourage businesses to buy equipment and invest in themselves, the U.S. government created Section 179. This tax code helps businesses by allowing them to write off the entire equipment purchase price the year they buy it, rather than a little at a time through depreciation.
For example, if you bought a new copy machine for $5,000, it would depreciate over its five-year useful life. Using straight-line depreciation, you’d deduct $1,000 of the cost each year. However, under Section 179, you could deduct then entire $5,000 expense from your income taxes the year of purchase, instead of the $1,000 deduction through depreciation.
WHAT ARE SECTION 179 LIMITATIONS?
Though advantageous, the tax code is limited by a $500,000 write off and a $2,000,000 spending cap. After businesses spend $2,000,000, the deduction begins to phase out dollar-for-dollar. This results in the value decreasing as the business’ income rises, making it most beneficial for small- and medium-sized businesses.
WHAT ARE OPTIONS FOR LARGE BUSINESSES?
Large businesses who exceed the Section 179 spending cap on new capital equipment can take Bonus Depreciation, which is offered at 50% and can be used in addition to Section 179. This benefits larger businesses that make equipment purchases greater than $2,000,000. Bonus Depreciation, however, only applies to new equipment, unlike Section 179 which covers new and used.
2016 Section 179 Example
Equipment Purchase: $650,000
First Year Write Off: $500,000
50% Bonus First Year Depreciation: $75,000
Normal First Year Depreciation: $15,000
Total First Year Deduction: $590,000
Cash Savings: $206,500
Equipment Cost After Tax: $443,500
(Assuming a 35% tax bracket)
HOW DOES THIS HELP ME?
Section 179 can greatly impact your bottom line. By deducting the full purchase price, you end up paying substantially less for your equipment. You can also benefit even more if you decide to lease or finance your equipment.
WHY SHOULD I PURCHASE EQUIPMENT NOW?
There is no better time than now to take advantage of Section 179 and Bonus Depreciation because this write-off expires December 31st. In order to receive this deduction, be sure to finance/purchase your equipment and put it into service by the end of the day on December 31, 2016.
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