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.
What is Section 179?
This is part of the Internal Revenue Code that allows for immediate expensing of capital purchases like equipment instead of deducting them over their useful lives (normally 5 or 7 years for equipment). Back when I started in 1997 the deduction was a mere $17,500, but has since grown to $500,000 per year. Recently, the $500,000 deduction was made permanent after a few years of “will they or won’t they” allow the deduction to go back down to $25,000. This means that you can make purchases of up to $500,000 a year and immediately expense the cost to directly reduce taxable income.
In a vacuum, Section 179 is a good thing. If we can defer income or accelerate deductions, there is typically some time value of money benefit to doing so.
What it's Not...
Unlike some of the literature I see, this is not a tax savings that is above and beyond what a taxpayer would normally get. Even if the law were repealed, the equipment you buy would still be tax deductible - just over a longer period of time. It is not a double-deduction as some people would lead a person to believe and it is not a no-consequence gain. The consequence of using Section 179 in a given year is that you give up the ability to spread out the cost of the equipment over say the next 5-7 years - whether this is good or bad is dependent on your personal situation. It is not a black and white issue.
Talk to Your Tax Person
I like Section 179, but it shouldn’t be used in every circumstance. For example, if I know a taxpayer has low income in a year perhaps because they are a start-up or took additional time off, I may choose to spread the deduction over 5 years so that the tax savings occurs at a later year when they have higher marginal tax rates. I may also elect to take the deduction over several years if the client is tight on cash and financing the purchase to better match up the tax savings with the outflows of cash.
The Important Questions
As a business owner deciding on a large capital outlay, the first (and most important) questions you must ask yourself are: "do I need the equipment to continue to do my work?" and/or "will the equipment make my business better?" If the answer to either of those is yes, then let’s figure out if Section 179 is right for you. Purchase equipment because it will improve your business and not for a tax deduction.