When we use an asset (movable or immovable) in business, the cost of purchase of that asset is not considered operating expense for the business. However, since the asset is used in producing income and loses its value over time, the tax law allows us to deduct a reasonable allowance each year for the exhaustion, wear and tear of the property. The allowance is spread over a number of years (based on the approved life of the asset).
Section 179 allows most taxpayers, who elect, to treat the cost of qualifying property, as an expense rather than a capital expenditure.
This means that if you purchase an asset for your business in 2011 and it is supposed to last for many years to come and produce income for your business, you can deduct all of the cost of this asset in your 2011 tax return.
This is a very attractive deduction, if we study the dynamics of it a little more. However, before we go into more details, let us discuss the limits on these deductions, as they are quite impressive to ignore.
The maximum deduction allowed under Section 179 was $250,000 per year for 2008 and 2009. For tax years beginning in 2010 and 2011, this deduction has been increased to $500,000.
The important news is that this expires on December 31, 2011. After that the deduction limit drops down to its original limit that is $25,000 (that's not typo: it would drop down to $25,000).
Let us look at how this would be a great benefit for your business without additional cash outflow.
If you have growth plans for the future and you anticipate a need for additional equipment for your business in 2012, you may want to consider it buying it in 2011. If structured carefully, you may actually end up with positive cash flow with the whole Section 179 deduction offering from IRS.
For instance, if you want to purchase an equipment worth $250,000 and if you can get financing on it, or are able to structure it as a capital lease, you would end up putting down a small amount for the acquisition of the equipment.
If you have to put down 10% as down payment, i.e. $25,000, it means you were cash out by $25,000 for the purchase of the equipment.
As a result of this purchase, with 10% down, you would now have a deduction of $250,000 to report on your tax return. Depending on your business' tax rate, you would most likely end up with cash positive as your deduction of $250,000 would result in a tax saving that is higher than the $25,000 that you put down for the purchase of the equipment.
If you need to buy equipment in 2012 - consider buying it now
Thus, 2011 is the most opportune time for businesses to invest in business assets that would qualify as Section 179 assets and deduct it in their returns.
This deduction is expiring in 2012 and thus this significant opportunity will be lost.
Even some real estate is included
One of the most amazing parts of this provision is that the IRS has included even some real estate into the category of qualified assets. This particularly includes restaurants and some retail leasehold improvements.
It would be a big loss for those who have growth plans - if deduction is not taken
Those businesses that are planning to grow in the next year or so and are planning to buy equipment, it is critical that they consider evaluating this option and hopefully save a lot of money on their taxes.
Amir Morani CPA CMA CFM CTP MBA is a practising public accountant and international business consultant based in Dallas, TX.
Amir Morani answers tax questions at http://www.OnlineTaxConsultant.com
Amir has a few tax publications in ebook format on amazon and can be searched under his name Amir Morani CPA
A. Morani CPA P.C. has an online presence at http://www.AMoraniCPA.com
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