As we enter the fourth quarter, now is generally the time that many small businesses begin evaluating their profit and loss statements with an eye to tax planning.
These days, year end tax planning has become a tricky undertaking so it might be in your best interest to bring in an accountant and tax professional to project year-end profitability as well as the underlying tax liability.
One can never be sure what changes Congress may institute in the final countdown of the year. Most new laws passed toward the end of the year become retroactive to the beginning of the year, while certain sun-setting laws are allowed to expire and others are renewed for another stretch.
Section 179 is one provision put into law more than 30 years ago that impacts small businesses and continues today although it’s tweaked every year with different requirements. Section 179 expensing of purchases of capital assets sets the rules for writing off technology upgrades.
In plain language, this means if you buy a new computer or a new desk or manufacturing equipment or any other item that has a useful life of more than a year, you will be allowed to write off the entire purchase price immediately rather than depreciate the expense over the item’s useful life.
For example: vehicles, machinery and equipment are usually written off over five years; furniture and fixtures over seven years. So rather than taking a little bit each year, by implementing Section 179, you are allowed to write off the entire amount and thereby save a load in taxes.
Many small business owners do not realize that Section 179 expensing can be applied to software purchases and other technology upgrades.
According to Jeff Connally, the CEO and president of CMIT Solutions, an IT service provider for the small business community, a recent online survey revealed that 45% of small to medium-sized business owners are not familiar with Section 179 of the tax code, which allows companies to write off up to $500,000 worth of qualifying new or used equipment purchased or financed during the 2013 calendar year. Connally states:
• Section 179 provides small business the opportunity to deduct UP TO $500,000 in accelerated depreciation on qualifying new or used equipment purchased or financed before Dec. 31.
• From a technology standpoint, the most pertinent application of the Section 179 deduction is the purchasing of hardware or software. Any small-business owner dreading the death of Windows XP next April can use Section 179 as a catalyst to upgrade his or her technology environment while also saving money on 2013 taxes. Once an operating system is no longer supported, It becomes very vulnerable to hackers.
• Right now, Section 179's allowance is forecasted to drop from $500,000 for 2013 to $25,000 in 2014, meaning anyone considering a major technology purchase should consult a trusted tax professional first and then talk to an IT provider about charting an upgrade course before the end of the year.
While Congress has threatened many times over the years to reduce the ceiling to $25,000, it generally leaves the threshold at a higher level making this a beneficial tax planning tool for business owners.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.