Using the Section 179 Deduction as a Planning Tool

Posted by Tini Graff, CPA

Section 179d Expensing - Delaware CPA FirmImagine a few weeks before the end of the year, you take a look at your income statement and realize you are showing a $50,000 profit.  First, you jump up and down because you realize you have had a good year.  Then the celebrating subsides when you realize you have to pay taxes on that profit.  What can you do to eliminate some of that profit and reduce your income tax liability?  This is a very common “problem” faced by business owners.  The Section 179 Deduction is a great tool to make this happen.

The Section 179 Deduction allows businesses to purchase certain assets and take the full expense in the year of purchase, rather than depreciate them over the useful lives of the assets.  However, not all assets qualify for this treatment.  In general, the assets must be tangible personal property, such as machines, equipment, or furniture.  These assets must be used in the course of business at a domestic company at least 50% of the time and must be purchased in the United States from a non-related party.  Buildings and their structural components are not eligible for the Section 179 Deduction.  Examples of qualifying property include, but are not limited to, automobiles, office equipment, construction equipment, and office furniture.

Tax Planning Tool

Now with a basic understanding of the Section 179 Deduction, how can you use it as a planning tool to reduce your taxable income?  With the company doing well, having either cash in the bank or a good credit rating, the purchase of new equipment may be warranted.  Rather than putting off the purchase of new computers for the staff or that new piece of equipment needed in your warehouse, you instead make the purchase and place the equipment in service before the end of the tax year.  Regardless of whether you pay cash or use credit to purchase the assets, you will be eligible to deduct the full cost on your tax return by electing Section 179 treatment.  Therefore, if originally you had a $50,000 profit and on December 18 you purchase and place into service $25,000 worth of assets, you now have taxable income of only $25,000.  Your staff is happy, your warehouse is happy, and you are happy!

While this is a wonderful and very useful deduction provided by the Internal Revenue Service, there are many rules and exceptions which can be cumbersome and sometimes complicated.   Only certain types of assets qualify.  You can only use the deduction on a certain amount of assets and the deduction can only be a certain amount.  However, it has been beneficial to many taxpayers throughout the years and it could be valuable to you too!  For more information, please consult with your tax advisor.

Photo by Will Scullin (License)

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