Section 179 Tax Deductions
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In December of 2015 Congress passed the Protecting American from Tax Hikes Act of 2015 (the PATH Act). The Path Act permanently increased your section 179 tax deduction for the purchase of new and used equipment to $500,000.00 from the previous standard, $25,000.00. There is a cap for this new deduction of $2,000,000. If your equipment purchases for the year exceed $2,000,000 the deduction amount will diminish. 

 

Here's an example of this tax deduction at work:

 

This year you spend $250,000 on equipment. Assuming your company is in the 35% tax bracket:

 

$250,000 x .35 = $87,500 (Amount You Would Owe In Tax Without Deduction)

$250,000 - $87,500 = $162,500 (Your Actual Equipment Cost After Tax Deduction)

 

Your $250,000 in equipment purchases ends up dropping to $162,500 after the tax savings!

 


This deduction can be a very valuable asset in your tax planning.


 

Here are some things to consider:

  • You must show a profit. A tax deduction will only benefit you if you have a profit to deduct the expense against. This deduction can only be used in the tax year the purchase is made. It cannot be applied to future years. If your profit for the year doesn't meet or exceed the amount of your purchase you can opt for the standard deduction - typically 20% per year over 5 years.

 

  • Leasing the equipment will probably not qualify.  In a lease the equipment is typically sold to the leasing company - not to you. Since you do not have ownership of the equipment your company is not able to take advantage of the deductions..

 

  • You may qualify for additional tax benefits from accelerated depreciation. This would only apply to purchases of new equipment. Accelerated depreciation is currently scheduled to decline after 2016 and be eliminated by 2019.

 

  • Always consult your accountant. Your accountant should be most familiar with your tax needs. Always ask them before making a decision.

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