Section 179 tax deduction: silver lining of fiscal cliff negotiations

Section 179 tax deductions extended

While many people and businesses are lamenting the non-extension of the payroll tax deduction this year, some of the elements that were pushed through in recent fiscal cliff negotiations do work in small business owners’ favor. Congress voted to extend the section 179 expense, which allows business owners to deduct the cost of depreciating business assets on their tax returns.

In 2011 the Section 179 limit was $500,000 but dropped to $125,000 in 2012. The limit was set to decrease again in 2013 down to $25,000, but the fiscal cliff package raised the limit back to $500,000 for 2013, as well as retroactively for 2012.

This extension will allow business owners to more heavily invest in equipment, office furniture and other business property and relatively quickly recover those costs in order to benefit from the added value to the company. Congress also pushed through a bonus depreciation until 2014, which allows businesses to recover up to 50 percent of the cost of any qualified business asset purchase in their tax return for that year. For example, if a business spends the maximum of $500,000 on depreciable business assets, the owner can deduct up to $250,000 of that cost on their return for the year and recover the rest of the total cost within a few years.

What if the section 179 tax deduction hadn’t been extended?

If the extension had not happened, owners would only be able to recoup around 14 percent of costs on their return, which would have substantially extended the time to value for small businesses.

The reduction in after-tax costs of purchasing new equipment gives small business owners an incentive to pony up money for much needed improvements without fear of non-reimbursement. Many businesses will likely still tighten the purse strings due to the raise in other personal and business taxes, but the extension of the section 179 $500,00 limit at least allows them to make improvements and investments in their business and quickly recover the costs.

Owners should consult with a tax professional for more information on how to successfully take advantage of the extension.