Section 179 of the federal income tax code addresses depreciation for specific small-business assets. The American Recovery and Reinvestment Act of 2009 (ARRA), better known as the stimulus package, raised the previous limits of the Section 179 deduction from $125,000 to $250,000.
It also raised the total amount of equipment purchased or leased for the year from less than $500,000 to less than $800,000. “This is slanted to small- to medium-size businesses,” says Ed Myerson of Myerson & Myerson, CPAs in Haymarket, Va.
Bottom Line Benefits
Assets that qualify include tangible property, such as computers, software, office furniture, office equipment, larger and more expensive tools, and vehicles acquired for a trade or business. There are specific rules for vehicles, but generally they must have a gross vehicle weight over 6,000 pounds and be used for business at least 50% of the time, which includes many work trucks.
The purchases must take place between Jan. 1, 2009 and Dec. 31, 2009, and Myerson says that the federal government is likely to extend the higher deductions through 2010.
So, if a remodeler spends $400,000 on equipment in 2009, he can immediately write off $250,000 of that amount in taxes. “It is very useful,” Myerson says. “It comes right off the bottom line.”
However, the deduction cannot be used to take a business income below zero because that would create a loss. For example, if a remodeler’s income for 2009 is $125,000 and he purchases the same $400,000, he or she can use the Section 179 deduction up to $125,000, then either carry forward the unused portion in future years or use other types of depreciation methods for the unused portion.
In addition to this increased deduction in Section 179, the ARRA also includes a bonus depreciation. Using the earlier example of the remodeler who purchased $400,000 worth of equipment in 2009: once he writes off the $250,000, he can also deduct 50% of the remaining amount. Myerson says that means the remodeler can take an additional deduction of $75,000 (50% of $150,000, which is $400,000 minus $250,000).
With the $250,000 deduction and additional bonus depreciation, small-business owners can plan for the future and can even save money on these types of investments. Myerson says that remodelers who purchase items on an extended payment schedule will benefit. “You might pay 20% of the total worth of the equipment this year, but you get 100% of the payoff,” he says. “Your write-off will be larger than your annual payment. That is a handy tax-planning tool.”
He says remodelers should note that states vary on their depreciation. For example, Virginia does not recognize the bonus depreciation. “However, these taxes are less than federal taxes, so the impact of it is less,” Myerson says.
—Nina Patel. senior editor, REMODELING.
Expense or Capital Asset?
Ed Myerson, of Myerson & Myerson, CPAs, says that most businesses draw a line above which they capitalize (claim the Section 179) and below which they expense a product. It’s usually in the $100 to $1,000 range, but the IRS offers guidelines for setting the threshold. If a remodeler purchases a $30 hammer, he would likely include it in expenses. If he spends more than $100 on an item such as a gutter forming machine, he would likely treat it like a capital asset and apply the Section 179 deduction. Myerson says that larger items such as table saws or cranes are appropriate subjects for applying Section 179. —N.P.