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Section 179 - 4th Qtr Tax Saving Strategy For Small Business

Dec 22, 2007
Use the power of available deductions to boost your business's bottom line in 2007. Purchase new or "new to you" used business equipment now. Then place it in service by December 31st to realize exceptional tax savings.

IRC Section 179 - What is it?

Under the provision of Internal Revenue Code Section 179, a business that spends less than $500,000 this year on qualified tangible property in 2007 may deduct the total cost of those assets, up to $125,000. Input the cost of the equipment that you're considering in the instant Section 179 Allowance Calculator to find out the potential cash savings.

Designed as an incentive for economic growth for small to medium sized businesses, Section 179 allows you to expense the purchase price of your qualified equipment immediately upon putting it into service. So, you see significant tax savings now, rather than depreciating your newly acquired assets over five or more years.

The Basics of the Section 179 Deduction

Under Section 179, businesses that spend less than $500,000 a year on qualified equipment can write off up to $125,000 in 2007. The rules are designed for small businesses; so, the $125,000 deduction begins to phase out if you purchase more than $500,000 in one year. Also, companies cannot write off more than their taxable income.

More on Tax Code Section 179

When acquiring equipment, including machinery, computers and other tangible goods, you obviously prefer to deduct the cost this tax year (2007), rather than a little at a time over a number of years. This tax code deduction (Section 179) essentially allows equipment purchases up to the amount approved for a given year to be deducted from taxable income, if purchases are installed by December 31st. Depending on the equipment and specific scenario of the business, any excess equipment cost above the amount expensed under Section 179 can be depreciated using standard methods.

This spending allowance is small business incentive for capital spending, which accelerates the economy and has a profound impact on our business (equipment finance) in the last quarter of the year. Tangible Goods financed by Equipment Loans or by most types of Equipment Leases (Non-Tax or Capital Leases) qualify for this deduction. Examples of Non-Tax (Capital) Leases include a $1 Purchase Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. Not all states follow federal law; contact your tax advisor for further detail.

What Tangible Property Qualifies?

Most new business equipment will fall under the rule of Section 179. Qualified equipment is defined in IRS Publication 946 and includes such common and movable tangible property as all kinds of machinery and equipment, as well as office furniture, computers, printers, software and most vehicles. Used equipment purchased from another party - but not from a company that is also owned by you - can also qualify.

What if I spend more than $500,000?

If your business spends more than $500,000 on business equipment this year, you can still leverage a tax savings. Each dollar over $500,000 you spend, however, reduces the maximum Section 179 deduction by a dollar. For example, if you spend $550,000, your maximum deduction for 2007 would be reduced by $50,000. This still allows you to deduct up to $75,000 of the cost of your new equipment in the first year.

Note: The allowable deduction amount cannot reduce taxable income below zero. The remaining value of your business equipment can still be depreciated over the prescribed recovery period.

You must act by December 31st

Tax Code Section 179 is an expense deduction provided for taxpayers who elect to treat the cost of qualifying property (Section 179 property) as an expense rather than a capital expenditure. The election, which is made on Form 4562, is for the tax year the property was placed in service. Under Section 179, equipment purchases, up to the amount approved for a given year, can be deducted from taxable income - if installed by December 31st.

What's the next step toward tax savings?

Action now will ensure the benefits of this tax opportunity to your 2007 business position. Purchase and place into service needed equipment before December 31st to maximize your deductibles.
IRC Section 179 deductions can pave the path to significant tax savings in 2007.
About the Author
Sean Marten is a Senior Credit Analyst at Crest Capital, a commercial equipment financing and business equipment leasing company headquartered in Atlanta, GA serving all 50 states.
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