Update: In the time since this post was originally written, the political and tax environment has surely changed, and as a result, the section 179 tax benefit becomes even more valuable in the 2016 tax year. If the new administration follows through with lowering the taxes of small businesses from a high rate of 35% to a flat 15% rate the depreciation write-off changes dramatically. Let’s suppose you purchase $200,000 of capital equipment in 2016, you would be looking at a tax break of $70,000 making the true cost of ownership of the equipment $130,000 (assuming a 35% tax bracket). Using the same section 179 tax deduction in 2017 you would receive a $30,000 tax benefit and the cost of ownership raised to $170,000. If the proposed tax plan comes to fruition in 2017 $40,000 of tax breaks would be left on the table. If you are considering a capital equipment purchase in the near future it would seem to be much more beneficial to complete the purchase in 2016.
Tax year 2016 2017
Purchase $200,000 $200,000
Tax rate 35% 15%
Deduction $70,0000. $30,000
Net cost of ownership $130,000 $170,000
As we near the end of the year it is time to think about tax implications affecting small businesses. 2016 may be the final year to take advantage of the section 179 tax benefit which allows business owners to write off capital equipment purchases up to $500,000. Section 179 has been a windfall for businesses, allowing taxpayers to write off the full cost of capital equipment in a single year rather than requiring it to be depreciated over 5 years. This allows business owners to add additional profit centers at a discount of up to 35%.
To take advantage of the tax savings the equipment needs to be purchased and put into use by midnight 12/31/16. For small and medium-sized businesses, not only will Section 179 help bolster their bottom line, they will reap the benefits of new equipment and technology that will help grow their business.
Below is an example of savings:
Section 179 Deduction: $150,000
Balance to Depreciate Over 5 Years: $0
Total First Year Deduction: $150,000
Total Tax Savings: $52,500
(utilizing a 35% tax bracket)
Net Cost of Equipment: $97,500
*As of December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 provides key tax incentives for investments in new business equipment. This legislation gives business owners additional tax deductions and depreciation opportunities through December 2016.