Section 179

If you own a business that buys equipment you have no doubt been told by your equipment salesperson that you need to take advantage of Section 179. There is quite a bit of misinformation out there regarding the deduction so this will hopefully set everything straight.

Section 179 allows a business to expense purchases of capital equipment instead of depreciating it over the useful life. Most equipment businesses buy are paid with current dollars but are depreciated over 5 or 7 years on an accelerated basis as prescribed by the IRS.

The current Section 179 rules state that a business can expense up to $250,000 of equipment purchases provided that their total capital expenditures are less than $800,000. The $800,000 limitation was put into place to keep this deduction limited to small businesses.

So at the end of the day a business can immediately expense an asset instead of expensing it over 5 or 7 years. The rule speeds up WHEN YOU CAN TAKE THE DEDUCTION AND IS NOT A SPECIAL DEDUCTION ON TOP. This distinction seems to have missed most salespeople. Another thing that is often not included in this conversation is the the State of Wisconsin has not followed the changes in Federal law and has a Section 179 limitation of $25,000.

So is Section 179 a good thing and should you use it? In tax planning we try to either defer taxes or avoid them. Section 179 helps a taxpayer defer taxes and that is a good thing. However, if you are in a low tax bracket it may make sense to spread the depreciation over 5 to 7 years especially if you expect to be more profitable in the future. In that case it would be wise to save your deductions for higher tax years when they can provide you more tax relief.