Small business tax deduction strategies: Maximize Section 179 write-offs
Even though most business property must be depreciated over a period of time, you can still speed up write-offs if you're armed with tax knowledge. That's because your not-so-secret weapon - the Section 179 expensing allowance - lets you write off most or all of the cost of most business assets in the very first year of ownership! Here are the ground rules.
Under Section 179 of the tax code, you can elect to instantly deduct, or "expense," the cost of qualified business assets bought and placed in service during the year, up to a certain limit.
Back in 2003, the maximum allowance was quadrupled from $25,000 to $100,000. Subsequent changes have pushed the limit even higher. Prior to 2008, the maximum deduction allowed under law was $125,000 (plus inflation adjustments), subject to phase-out.
Initially, the inflation-indexed amount for 2008 was set at $128,000. However, the Economic Stimulus Act of 2008 increased the maximum deduction to a whopping $250,000 for 2008 only. It also jumped the phase-out limit from $500,000 to $800,000.
For 2009 and 2010, the maximum deduction will revert to $125,000, and the phase-out limit will return to $500,000 unless Congress takes further action.
Strategy: Rethink your long-term strategy on equipment buying; front-load more purchases into this year. Remember that the maximum Section 179 deduction is scheduled to fall back to $125,000 in 2009.
Tip: Find key limitations on Section 179 allowances in Small Business Tax Deduction Strategies: 11 tips, a new special report from Business Management Daily.
Trigger quicker writer-offs
You can maximize the Section 179 expensing deduction with some shrewd tax planning. Here are four ways to get more bang for your buck:
- Put the company in the black. The tax law limits your annual deduction to the amount of your taxable income. If your company typically zeroes out its taxable income through compensation payments, give yourself some leeway to claim the allowance.
- Boost your business income limit. Don't forget that your business income includes all income from businesses in which you actively participate. If you pull down a salary, either part time or full time, in addition to running a business, the extra income increases the amount of the allowance.
- "Log in when you log on." If you're claiming the allowance for assets used partially for non-business reasons, maximize the business percentage. Suppose you buy a PC to work at home, but your kids also use it to instant-message their friends. If you use the computer 90 percent for business, you can deduct that percentage of the cost under Section 179. If the business use drops below 50 percent, you can't claim the allowance.
- "Gentlemen (and ladies), start your engines." You can claim the Section 179 allowance only for equipment that's "placed in service" in 2008. You get no deduction if you buy a machine in 2008 but don't take it out of the box until 2009.
Don't forget that the Section 179 deduction can be combined with bonus depreciation for 2008 only. This is an unparalleled one-two punch for business owners.
Front-load asset purchases before year-end
The $250,000 Section 179 expensing allowance will take a nose dive after 2008. The $125,000 limit will return for 2009 unless Congress takes further action. For that reason, you'll want to load up on equipment and other assets before then. However, this buying spree could put your company in a money crunch.
Strategy: Borrow what you need to finance your purchases. You can claim the full Section 179 allowance on the equipment cost, even if you don't immediately pay for the purchases. The critical figure is the cost of the property, not the amount you spend out of pocket.
Let's say your small company generates $5 million in sales a year. You can boost the bottom line by buying new machinery costing you $200,000, but you have only $125,000 in cash on hand. If you borrow the $75,000 balance and buy the equipment this year, you can write off the entire $200,000 as long as the equipment is placed in service before year-end. Plus, that leaves another $50,000 expensing allowance available for other assets placed in service in 2008.
Tip: Of course, you'll need to pay interest on a business loan, but you can also deduct the interest as a business expense.
Reprinted with permission from Business Management Daily.