by Bill Sweet
I had the exciting opportunity to meet Barry Ritholtz of Ritholtz Wealth Management, The Big Picture, and Bloomberg just before Christmas. I wanted to pass on an article he wrote yesterday about a change that we've been discussing to the office concerning the Section 179 deduction.
A Break For Small Business
Quick primer on Section 179: it's a provision in the tax code that allows businesses to fully deduct the cost of certain business equipment (including some leased property), instead of deducting the cost of the purchase partially over several tax years (depreciating the property).
Let's discuss two quick examples. A business owner buys a new desk for $1,000 on 12/01/15. Let's say the desk has a usable life of about five years. Without a Section 179 election, the business owner would pay $1,000 for the desk in 2015, but only be able to deduct a certain percentage of that purchase on his 2015 tax return - for simplicity's sake, let's use a straight line method of 1/5th per year, so $200 in 2015, $200 in 2016, $200 in 2017, etc, even though he spent the money back in 2015.
Conversely, if the desk was eligible for a Section 179 deduction, he'd be able to deduct the entire purchase on his 2015 tax return. Done. Quick. Easy. $1,000 paid, $1,000 deducted. Makes sense, right?
There actually isn't anything significantly new going into effect in 2015 - the rules retroactively extended the Section 179 and bonus depreciation rules that were in effect in 2014.
The only catch is that if the business property is sold for anything above what you previously deducted - in the case of Section 179 property, that's anything above $0 - you must reclaim the sale as income in the year sold. Few taxpayers grasp this nuance. While most of the time it is beneficial to take tax deductions up front, particularly since you're outlaying your capital up-front unless you're financing or leasing equipment, this can create a nasty surprise of depreciation recapture down road. This happens a lot to clients of mine who have owned and depreciated real estate properties for several years. It's not a bad thing, just something to be aware of going in.
What is particularly exciting is that the deduction appears to be permanent. For the past four tax years, we've been waiting to inform clients potentially affected by these rules as to whether or not we believed that purchases would be deductible. Even this law was only passed on December 18th - far too late in the tax year for most business owners to plan and execute any equipment purchases, given that by law any purchase needed to be placed in service prior to 12/31/15.
I'm glad that we won't have to deal with the last-minute nature of Congress in this respect again next year.
- Bill
