Section 179: Get a Tax Break on IT Buys
The federal government has extended a tax deduction that lets small businesses expense technology purchases.
The Hiring Incentives to Restore Employment (HIRE) Act, passed by Congress and signed into law by President Obama in mid-March, extends a tax deduction allowing small businesses to deduct up to $250,000 in equipment purchases, including technology such as computers, networking gear and off-the-shelf software.
Section 179 of the tax code lets businesses deduct equipment bought in one tax year, rather than amortizing the expense over a normal depreciation schedule, which is typically five to seven years. Historically, the deduction has been $25,000 a year, but the government has increased the tax break multiple times since 2003 to help stimulate the economy. The yearly deduction, which reached $250,000 for 2008 and 2009, was scheduled to drop to $125,000 for the 2010 tax year.
The HIRE Act provides a one-year extension that keeps the deduction at $250,000 for 2010, but it does not extend a 50 percent bonus depreciation that was available the past two years.
The tax break is popular among small businesses because it makes a difference to their bottom line, says CCH principal tax analyst Mark Luscombe. “It’s an immediate tax benefit. If you need to buy something, you can immediately expense something that would normally have to be depreciated over a period of years.”
The spending limit for Section 179 remains at $800,000 for 2010. That means small businesses can take the full $250,000 deduction as long as they don’t spend above the limit. For every dollar a business spends above the limit, the business must subtract a dollar from the deduction.
To take advantage of Section 179 for the 2010 tax year, companies must buy equipment by Dec. 31. The deduction is scheduled to drop to $25,000 for the 2011 tax year unless Congress once again extends the higher deduction, Luscombe says.
Congress revisits Section 179 nearly every year, which raises the question: Why don’t politicians make the higher deduction permanent? Luscombe explains that it’s a strategic decision because the government wants to encourage businesses to make purchases and stimulate the economy immediately.
“If it’s permanent, there’s no incentive to act now,” he says. “Companies will know it’s always there next year, and they could spread out their equipment purchases more evenly. By having this expire, people don’t know for sure that the $250,000 level will be there next year, and it creates an incentive for people to buy before the end of 2010.”
Besides extending the higher Section 179 deduction, the HIRE Act includes two tax benefits for businesses that hire unemployed workers. It exempts business owners from paying their 6.2 percent share of the Social Security tax on wages. Businesses can also claim a $1,000 tax credit for each unemployed worker that it hires and retains for a year.
Rockford Construction in Grand Rapids, Mich., has taken advantage of Section 179 in recent years and plans to do so again this year, says Shawn Partridge, the company’s vice president of IT.
The company spends $100,000 to $150,000 a year on technology. The tax benefit reduces the company’s financial burden so it can invest in more technology projects each year, Partridge says. Last year and this year, Partridge has focused on refreshing computers and buying software licenses.
“It always helps to stretch the budget a little bit. Section 179 lets us do more projects than we would be doing otherwise,” Partridge says.
- Purchase $450,000 in new tech equipment
- First-year write-off from Section 179 expensing: $250,000
- Regular first-year depreciation, calculated at five years, or 20% per year: $200,000 x 20% = $40,000
- Total first-year deduction: $250,000 + $40,000 = $290,000
- Total savings (assumes a tax rate of 35%): $290,000 x .35 = $101,500
- Final equipment cost: $450,000 – $101,500 = $348,500