A Better Deduction for Equipment

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April 08, 2010

Make sure your company takes full advantage of one of the best tax breaks available to business owners today -- the "Section 179" first-year depreciation allowance for equipment.

 Take a look at what makes this deduction so valuable:

With Section 179 - You can write off business equipment in one year, rather than depreciating it over several years. This includes computers, copiers, fax machines, telephone systems and office furniture. The annual Section 179 allowance for taxable year 2010 is $250,000.

Without Section 179 - Money spent to purchase business-related equipment must generally be recovered over a period of years, through depreciation or amortization.

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Ground Rules: In order to qualify for the Section 179 tax break, you must use the equipment more than 50 percent of the time for business. (If you use it for personal purposes too, you must keep records and you're only allowed to deduct the business-related percentage.)

The amount you write off for Section 179 can't exceed the taxable income from your business. That may be a problem for C corporations if the business zeroes out its income (typically by paying deductible salaries and bonuses to shareholders) because there won't be enough income to cover the Section 179 election.

It might be better if the corporation pays less compensation and keeps enough taxable income to cover a Section 179 election.

You can carry over any excess to future years if you run up against the income limitation. The deduction also begins to phase out when you buy more than $800,000 worth of equipment during 2010.

What if you anticipate your C corporation will operate at a loss in 2010 but expects to turn a profit in 2011? You might be better off postponing eligible expenditures to the profitable year of 2011 when the company's cash flow is better and the Section 179 deduction can be fully taken advantage of that year.

With some careful timing, you can utilize your full $250,000 tax break for 2010. Look around your company toward year-end and buy any equipment you need.

As long as you "place it in service" by December 31, you can deduct the equipment with Section 179. You can even pay for it next year on credit and still write it off on this year's tax return.

Tip: Many business owners are involved in more than one venture. In the case of pass-through entities (partnerships, LLCs, and S corporations), the dollar limitation rules for the Section 179 deduction apply at both the entity level and the owner level. (IRS Regulation 1.179-2) Therefore, advance planning may be necessary to maximize Section 179 deductions at the owner level, which is where the write-offs really count. Consult your tax adviser for details.

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