Many small business owners are breathing easier now that new legislation makes it clear how much they can deduct for 2015 purchases such as computers, furniture, vehicles, and machines under the popular Section 179 deduction.
Many small business owners had been anxiously waiting last week to find out if the tax extenders package in Congress, which President Obama signed on Friday, would raise the fiscal 2015 cap for the Section 179 deduction from the existing $25,000 to the $500,000 level it was at from 2010 to 2014. It did.
The bigger deduction, aimed at stimulating the economy, covers computers, furniture, vehicles and machinery. Under the provision, small business owners can deduct the full purchase price in the year they bought it.
“It’s one of the most immediate, tangible things most small businesses do in some form,” said John Arensmeyer, founder and CEO the Small Business Majority, a network of 42,000 small business owners. “It has a very immediate benefit for them.”
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The legislation also made the deduction permanent, enabling small business owners to do better long-term planning for 2016 and beyond, say experts. “Small businesses can operate in 2016 knowing what the rules are,” says CPA Paul Gevertzman, a tax partner at Anchin, Block & Anchin in New York City.
So how can you put Section 179 to work for you? Here are four moves that small business owners can take now.
Do some last-minute shopping. There’s still time to make purchases that qualify for the Section 179 deduction, but only if you put them into service by the end of the year.
CPA Anne Zimmerman is considering this strategy. She owns two Cincinnati businesses: six-employee Zimmerman & Co. CPAs and 10-employee Zimcom Internet Solutions in Cincinnati. Zimmerman took the full $500,000 deduction in 2014 to cover technology equipment she bought, but spent cautiously this year, not sure if Congress would raise the cap to that level. As of December 18, she had only made about $25,000 in qualifying purchases.
Now she's considering making new investments before the year’s end. “We’ll buy additional servers and other internet equipment that we need for our business,” she says.
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Fortunately, with the benefit made permanent, she and other business owners won’t have to play the same guessing game next year. “We can plan for our purchases and plan for our growth,” says Zimmerman.
Offset profits. Steven Elliott, owner of Oren Elliott Products, took a giant leap of faith this year when he bought $460,000 worth of machine tools so he could fill orders at his 48-employee Edgerton, Ohio, manufacturing plant, which makes parts for machines that, in turn, are used to create computer components.
Now that the cap on the deduction has been raised, he can use Section 179, in conjunction with other strategies, to offset the $500,000 in profits his plant will make on about $5.5 million in revenue this year.
“We won’t pay very much in taxes this year,” he says. “That’s the great benefit.”
Reinvest in your business. By taking the Section 179 deduction, Elliott will free cash that he can put into new equipment he needs to keep his business current.
“It allows us to retain that money so then we can reinvest it immediately next year,” he says. “We’ve been looking at robotic arms. They are $80,000 a piece.”
Even if you have no need for robotic arms in your business, taking Section 179 can still improve cash flow. Ask Jeremy Brandt, CEO and founder of WeBuyHouses.com, a 10-employee provider of technology to residential real estate investors. This year, he expects to use it to cover about $20,000 in office equipment and computers purchased in 2015, allowing him to put that money back into the business right away.
“It’s always better to have money today than five years from now, or to have a deduction today rather than over five years,” he says.
If you’ve wanted to create a more environmentally friendly workplace, you may also benefit from the Section 179D deduction, which affects small businesses that own energy-efficient commercial buildings. It was also extended, through the end of 2016. It allows building owners who build a new energy efficient building, or retrofit an existing one, to meet certain benchmarks to get a deduction that maxes out at $1.80 per square foot.
“Basically, it has expired each year,” says CPA Robert Brewer, an executive partner in accounting firm Grassi & Co., which has three offices in the New York City metropolitan area. With the law extended, he expected small business owners to think in a more long-term way about using it. “Instead of it being on an annual basis, this gives you two years to plan for it,” he says.