How would you like a new computer for your business this holiday season?

 

Even better, how about ten computers, a few printers, and some iPhones? Or maybe an SUV – how would that Hummer look under your tree (awkward comes to mind, but it’s doubtful anyone would complain.)

 

The preceding will happen for millions of businesses this holiday season, with the IRS playing Santa Claus. All because of a provision to the US tax code called Section 179.

 

What is Section 179, and how does it work?

 

In simple terms, Section 179 is an attempt by the United States government to stimulate the economy by encouraging small to medium sized businesses to purchase equipment this year by making it very advantageous in a tax sense.

 

In a nutshell, it works like this:

 

Normally, when a business purchases equipment, they do not get to “write it off” right away. They instead must “depreciate” it over the course of several years. So a business could not realize the full tax advantages until years after the fact.

 

Section 179 does away with this, and allows certain pieces of equipment (including most electronics and office machines, and even some vehicles) to be deducted in full the year they are purchased. This is an enormous differential, and indeed spurs many businesses to make year-end purchases (because the equipment must be purchased and put into service by midnight 12/31/2007.) 

 

Consider this:

 

Under the old provision of depreciation: A business purchases a $5,000 computer system, and yields a taxable income savings of $1,000 a year over five years. Yes, that’s nice, but it’s hardly going to make a business run out and buy a system right now. A business would simply buy the computer system when they needed to upgrade, and not a minute sooner.

 

Under section 179: That same business would realize the full $5,000 deduction this year. This can have a profound effect on the taxes this business pays. That might make the business buy the system right now.

 

Why right now? Because tax codes change, so the smart business will take advantage of Section 179 while it’s viable and actually look to buy qualified equipment this year. And since many pieces of needed equipment qualify (even many SUV’s qualify), it makes it very easy to justify a year-end purchase (statements like “we were going to need new computers anyway – so we may as well save some tax dollars” are often heard around the office supply store.) 

 

Just like Santa doesn’t bring gifts to bad children (so the rumor says); there are some limits to what a business can deduct. While the list of qualified equipment is extensive, you still may want to make sure what you are buying qualifies. There is also a limit to how much money can be spent. $500,000 is the limit that a business can spend on qualified equipment to fully qualify for the deduction, and the total deduction cannot be more than $125,000. But most small businesses will not reach these numbers, so Section 179 is truly a “small to medium sized business” deduction, and aimed squarely at helping these businesses grow.