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Section 179 Election: The Secret Weapon

Bonus depreciation deductions are gone for good. That means small-business owners generally are required to write off equipment costs under the Modified Accelerated Cost Recovery System (MACRS). Typically, it will take years using MACRS deductions to recoup the cost of business equipment placed in service in 2006. However, you still have a “secret weapon” in your arsenal.

With the Section 179 “expensing” election, you can rescue faster write-offs for qualified equipment purchases. Depending on your situation, you may be able to deduct the entire cost in the year the equipment is placed in service.

Background: Under Section 179 of the Internal Revenue Code, a taxpayer can elect to currently deduct, or “expense,” the cost of qualified business assets purchased and placed in service during the year. After the maximum allowance was quadrupled from $25,000 to $100,000 by the 2003 tax act, subsequent inflation adjustments have pushed the limit even higher. For 2006, the maximum allowance is $108,000 (increased from $105,000 for 2005).

If the amount expensed under Section 179 does not equal the cost of the equipment—or you choose otherwise—you can still write off the balance under the regular MACRS rules.

The Section 179 election is available to most business taxpayers, but there are two important rules that may limit your annual deductions.

1. Annual business income limit: The expensing deduction cannot exceed the net taxable income from all the businesses you actively operate. For this purpose, net income is figured without regard to expensing, the 50% deduction for self-employment tax and any net operating loss (NOL) carryforwards or carrybacks.

2. Annual dollar cap: If the total cost of qualified property placed in service during the year exceeds an annual threshold (indexed for inflation), the maximum expensing allowance is reduced on a dollar-for-dollar basis. The threshold for 2006 is $430,000 (up from $420,000 for 2005).

Update: Although the maximum Section 179 allowance was scheduled to revert to $25,000 in 2008, new legislation extends six-figure deductions for two more years. This tax law change gives you more flexibility to plan future purchases.

Of course, taxes are one of the key factors to consider in equipment purchases. Make sure you stay within the two limits for Section 179 deductions.

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	[ return to list ] Section 179 Election: The Secret Weapon Bonus depreciation deductions are gone for good. That means small-business owners generally are required to write off equipment costs under the Modified Accelerated Cost Recovery System (MACRS). Typically, it will take years using MACRS deductions to recoup the cost of business equipment placed in service in 2006. However, you still have a “secret weapon” in your arsenal. With the Section 179 “expensing” election, you can rescue faster write-offs for qualified equipment purchases. Depending on your situation, you may be able to deduct the entire cost in the year the equipment is placed in service. Background: Under Section 179 of the Internal Revenue Code, a taxpayer can elect to currently deduct, or “expense,” the cost of qualified business assets purchased and placed in service during the year. After the maximum allowance was quadrupled from $25,000 to $100,000 by the 2003 tax act, subsequent inflation adjustments have pushed the limit even higher. For 2006, the maximum allowance is $108,000 (increased from $105,000 for 2005). If the amount expensed under Section 179 does not equal the cost of the equipment—or you choose otherwise—you can still write off the balance under the regular MACRS rules. The Section 179 election is available to most business taxpayers, but there are two important rules that may limit your annual deductions. 1. Annual business income limit: The expensing deduction cannot exceed the net taxable income from all the businesses you actively operate. For this purpose, net income is figured without regard to expensing, the 50% deduction for self-employment tax and any net operating loss (NOL) carryforwards or carrybacks. 2. Annual dollar cap: If the total cost of qualified property placed in service during the year exceeds an annual threshold (indexed for inflation), the maximum expensing allowance is reduced on a dollar-for-dollar basis. The threshold for 2006 is $430,000 (up from $420,000 for 2005). Update: Although the maximum Section 179 allowance was scheduled to revert to $25,000 in 2008, new legislation extends six-figure deductions for two more years. This tax law change gives you more flexibility to plan future purchases. Of course, taxes are one of the key factors to consider in equipment purchases. Make sure you stay within the two limits for Section 179 deductions. [ return to list ]
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