As we near the 4th quarter, we enter that time of year when equipment reps will extol the virtues of Section 179 of the tax code to entice you to buy equipment. I’ve seen some literature that makes Section 179 look like it’s a one-time savings that you need to take now or risk losing it. At best, some of the opinions and information can be misleading; at worst, flat-out wrong and damaging. Below is a quick review of Section 179 and the implications of its uses.
In reviewing a new client’s tax situation, I had the unpleasant task of informing them that the losses they were incurring would not be deductible. In setting up their business they decided to become a S-Corporation because they had heard, through message boards, that was the best way to go. It’s hard to argue because, for many of our established clients, the S-Corporation is the most tax efficient option. However, if you are just starting a business or you just purchased one, it may make sense to wait before you make the election. Here’s why:
Losses Might Not Be Deductible
In order to deduct losses in a business you typically have to have two things:
1. You must be active in the business
2. You must have basis to take the loss