BELIEVE IT OR NOT, we are already more than halfway through 2009. For small-business owners, that means the clock is ticking on some favorable tax incentives. If your business is healthy enough to buy equipment or software, the federal income tax perks for doing so are better than ever. Here’s what you need to think about before the year is over.
Supersized Section 179 Deduction Privilege Has Short Shelf Life
For tax years beginning in 2009, many small businesses can potentially deduct up to $250,000 of purchased (not leased) equipment and software as soon as these items are put to work. Both new and used assets are eligible. This valuable break is called the Section 179 depreciation deduction privilege, and it’s an exception to the general rule that you must depreciate equipment and software costs over several years.
But to take advantage of this supersized $250,000 allowance, you’ll have to act fast. The allowance will fall back to only about $135,000 for tax years beginning in 2010 (the exact number depends on an inflation adjustment we don’t yet know). So if your business uses the calendar year for tax purposes, you only have until Dec. 31 to take advantage of the generous $250,000 allowance (unless our beloved Congress extends it, which could happen). While the Section 179 deduction can be a very sweet deal, there are a few things you need to know before charging out to buy a bunch of equipment and software in hopes of lowering your tax bill.
If a Business Is a C Corporation
A business operating as a regular C corporation cannot claim a Section 179 deduction that would create or increase a tax loss for the year. In other words, the deduction is limited to the amount of corporate taxable income before the deduction. So if your outfit is having a marginal or lousy year, the allowable Section 179 write-off might be little or nothing. On the other hand, if your company is having a decent year (despite the bad economy), buying enough stuff to claim the maximum $250,000 deduction would reduce your company’s taxable income by that amount and save it plenty on taxes. (Beware: some states don’t permit the full $250,000 federal allowance for state income tax purposes.)
If a Business Is a Sole Proprietorship, Partnership, LLC, or S Corporation
In this scenario, business deductions are passed through to you and written off on your personal Form 1040. However, the Section 179 deduction rules are tricky because various limitations can apply at the partnership, LLC, and S corporation level and at your personal level, too. For example if you’re an S corporation shareholder, you can potentially claim a Section 179 deduction on your Form 1040 for your ownership share of qualifying assets acquired by the company. However, you can’t claim over $250,000 in Section 179 deductions on your Form 1040 no matter how many businesses you’re involved with. Also, you can’t claim Section 179 deductions that would create or increase an overall business tax loss on your Form 1040. For this purpose, any salary you earn counts as business income; ditto for salary earned by your spouse if you file jointly. So be sure to check with your tax advisor to find out how the Section 179 deduction rules will play out in your specific situation before making big purchases.