05 Dec Section 179
The following article was written by a long time NPI Client- Charlie Grass of Grass CPA & Associate. We asked Charlie to write something about Section 179 because we are asked about it every year, however we are good computer people, not good tax people. So we wanted to get some answers for companies from a expert in the field. AG
I hear from business clients, frequently late in the year, asking how much they will save in taxes if they buy a new piece of equipment before the end of the year. Well, it depends;
- Will it be in service before the end of the year? – if not, none. Not in service, no deduction.
- How much qualified equipment have you bought already this year? There are limitations.
- What is your expected business net taxable income for the year? Deduction limited to income.
- How much other income will land on your return? Deductions? Filing status?
- What is your marginal tax bracket? The tax rate you pay on the next dollar of income.
- What is your business and tax structure? Pass-thru entities affect the individual return.
Let’s flesh in some details: Section 179 of the Internal Revenue Code allows for the full deduction of the purchase cost of qualified business property. Generally, three, five, or seven-year equipment which can include business vehicles. For this short memo ‘business vehicles’ are 100% business use trucks, delivery vehicles, and vans. Qualified business property that is placed in service before the end of the year. In service means it is delivered, installed, and being used in the business activity.
Back to the tax savings, if you deduct it, your taxable income is less, and your taxes are less. ‘Well duh Charlie!’. Or are they? And what about next year? Or when you retire?
Example: A self-employed contractor buys a new backhoe in March to replace the old, tired and frequently broken-down backhoe. The new backhoe is qualified property, placed in service in the year. Our contractor takes the section 179 deduction reducing his/her taxable income to near zero and the taxes too. Great! Big refund or no big tax payment. Next year, no depreciation, no repair bills and that backhoe is making money. Taxable income is up dramatically and so are the taxes. Maybe two or three times what was saved the year of purchase.
Was the section 179 deduction a good move? Maybe, if the contractor has a multi-year plan to buy equipment and can keep to the plan. How many years can our contractor keep buying equipment?
And what about the contractor’s retirement plan contributions that are based on income? Lower income, lower contributions, less retirement income. Same for Social Security; lower thirty-year inflation adjusted average earnings, lower benefits.
At Grass CPA & Associates LLC, we are passionate about your taxes; when we propose a tax election, and section 179 is an election, we want to be looking at the multi-year effect of the choices. We are interested in in every aspect of your tax preparation. Whether it’s current taxes or planning for your future, we’re in your corner! Call us today. Let’s talk tax.
Grass CPA & Associates LLC