Among the many tax breaks enjoyed by small business owners, perhaps none is as valuable as the so called "Section 179" deduction for purchasing equipment. The basic rule is that you can deduct up to $112,000 (for 2007) of purchases of most business equipment. The amount is reduced for large businesses that purchase more than $450,000 of equipment.
Why is this such a benefit? Because without this "immediate expensing" provision in the law, the only way to deduct the cost of equipment is through a depreciation deduction. A depreciation deduction allows you to deduct the cost of the equipment over a number of years, usually between 3 and 7. By getting to deduct the entire cost now, you are getting your taxes reduced NOW, which is a large financial benefit, due to the effect of inflation (i.e. a dollar today buys less than a dollar 7 years ago).
To take the 179 deduction, add up the cost of all "qualified" equipment. Most computers, software, furniture, machines, etc. you purchase qualify. Automobiles used primarily for business qualify, but there are limits you should discuss with your tax advisor. Also, land, buildings and their structural components do not qualify. There other more obscure exceptions, so double check before you take the deduction.
One important rule is that you can only take the Section 179 deduction to the extent you have trade or business income. In other words, if your business is already operating at a loss, and you have no other trade or business income, then you can't take the deduction. Fortunately, any salary and wages you or your spouse earn counts as trade or business income. That means you may be able to take the deduction for a part time business that operates at a loss, if you have income from a salary to offset the deduction.
All in all, the 179 deduction for equipment purchases is a tax bonanza for the small business owner. Take advantage of it if you can.
About the Author
Thomas Norton, CPA is the St. Louis based founder and owner of Thomas Norton & Company, LLC. Tom specializes in small business taxes and accounting, and is available to speak to your group on various small business and tax topics. For more information and to subscribe to his free monthly email newsletter that gives timely tax and financial advice, go to http://thomasnortoncpa.com/newsletter.shtml
