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Section 179 Deduction: Little-Known Congressional Ruling Could Affect Small Business Owners Everywhere


Ben Goldstein


By: Wayne Duggan

As 2015 draws to a close, small business owners are watching and waiting for Congress to reach an agreement about this tax year’s Section 179 deduction. For small businesses, Congress’s decision could mean the difference between a $25,000 expense deduction cap and up to a $500,000 cap.

As the clock ticks on the $1.1 trillion spending bill that would clarify this year’s Section 179 deduction, many small business owners’ budgets remain up in the air, and the delay is already impacting their operations.

What is the Section 179 deduction?

The Section 179 deduction is an asset depreciation deduction on equipment purchased for a business. Business owners have always been allowed to deduct asset depreciation, but Section 179 allows them to deduct an asset’s total depreciation up front.

Related link: 5 small business tax loopholes you can take advantage of.

For example, the expense of a $4,000 computer would normally only provide a $400-$800 per year depreciation deduction over a period of six years using the straight-line depreciation method. However, Section 179 allows a business owner to deduct the full cost of the computer from his or her income taxes up-front, assuming the total amount of deductions remains below the maximum deduction cap.

What assets qualify for the deduction?

The IRS allows for the deduction of the cost of tangible personal property that is purchased for business use if it will last more than a single year. The property must be primarily used for business, meaning that at least 51% of its use is business-related. There are also several notable property exceptions that cannot be counted toward a Section 179 deduction, including land, permanent structural attachments, intangible property and air conditioning and heating units.

For the full list of qualified and disqualified property, check the IRS site devoted to Section 179.

How much can be deducted?

By law, the Section 179 annual deduction limit is only $25,000. However, Congress votes every year to increase the amount of the deduction for that tax year. In the past, the annual deduction increases typically expanded modestly to keep up with inflation.

Starting in 2008, Congress essentially started using the Section 179 deduction as a stimulus measure for the shaky economy. The limit was upped to $250,000 in 2008 and 2009 and then raised to $500,000 per year every year since. Now, with the economy back in full swing and the Federal Reserve likely to raise interest rates within the next few months, the fate of the 2015 Section 179 deduction remains up in the air.

Related link: How to get a loan when you’re self-employed.

Down to the wire

Not only is the delay in setting the Section 179 deduction limit impacting businesses that are waiting to buy equipment, businesses that sell products used by other businesses are losing sales while their customers wait to see how high their deduction limit will be. Businesses that use or sell expensive machinery, such as farming equipment, are particularly impacted by the deduction cap.

Congress had initially hoped to get the spending bill that includes the Section 179 provision completed by December 11. However, the gridlock and dysfunction that has become standard in Washington now has talks on the bill at a standstill.

The critical period for a decision is fast approaching, as tax law requires that businesses purchase equipment and have it in use by December 31 in order to qualify for the Section 179 deduction. With less than three weeks remaining until the end of the year, and holiday shipping delays and business closures expected, many small businesses may soon have to assume that a $25,000 deduction is all they are guaranteed in 2015.