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Reducing Your Business Taxes With Section 179 Deductions

(2003, 2004, 2005, due to the Jobs and Growth Tax Relief Reconciliation Act of 2003)

(Or: Question:

Oh, No! I underpaid my estimated taxes by $55,000! What can I do now?"

Answer: Buy a Hummer.)

Section 179 deductions are a way that small businesses are allowed to expense, in the current year, business assets that are usually depreciated over many years.

Neglecting half-year conventions and other details, suppose you purchase a business machine with a depreciable life of five years for $10,000. This means, according to straight-line depreciation, that you'd "write off" or "expense" $2,000 of the asset per year for five years. That is how a business owner would recover the cost of the capital asset. Businesses generally aren't allowed to "write off" the cost of a long-lived asset in the year of purchase.

The passage of the "Jobs and Growth Tax Relief Reconciliation Act of 2003" in May of 2003 increased the Section 179 deduction to a whopping $100,000 on qualified assets. (Previously, the deduction was $25,000.)

The definition of Section 179 qualified property has also been expanded to include off-the-shelf software, although Section 179 still doesn't apply to custom-written software. (It was a pain to amortize the cost of silly software programs and keep depreciation schedules for them! Now, off-the-shelf software can also be Section 179'd. For example, publishers who purchased programs, such as PageMaker, PhotoShop, Quark, etc., in 2003 will be able to expense them immediately.)

For those new to business depreciation (and IRS Form 4562), IRS Publication 946 discusses depreciation and Section 179.

For more about the 2003 tax act, see the IRS website:

http://www.irs.gov/businesses/small/article/0,,id=110431,00.html

Much media coverage of the expanded Section 179 deduction is the result of another curious tax loophole which allow vehicles over 6,000 pounds to be treated differently from "regular" passenger vehicles. In particular, before the advent of huge SUV's, weight was considered a sufficient criterion to separate passenger cars from light-duty industrial trucks and work vehicles used by farmers and other businesses.

However, the trend toward bigger vehicles means that many people drive passenger vehicles rated over 6,000 pounds. (We won't get into the complexities of how vehicles are weighed. It's not as simple as you might guess.) And, Section 179 applies fully to these SUVs ("passenger" vehicles are subject to their own rules).

For more about the full deductibility of SUVs in the current year under Section 179 and vehicle deductibility in general, read:

http://www.taxpayer.net/TCS/whitepapers/SUVtaxbreak.htm (best place to start)

http://www.taxpayer.net/TCS/whitepapers/SUVtaxcredit.pdf (titled "A Hummer Of A Tax Break")

http://www.citizen.org/documents/SUV_tax_cmterpt.pdf

http://www.mileagebooks.com/section179.html

http://www.taxnewsletters.com/newsletters/taxPlanning/taxPlanning20031101.html

http://www.brinkersimpson.com/tax%20tips.htm

I provide these links for informational purposes only.

http://www.taxpayer.net/TCS/whitepapers/SUVtaxbreak.htm points out that all SUV's turn out to be fully deductible in the first year, with the exception of the Hummer H1 (an expensive little bugger at $110,000. Only $106,000 is deductible under Section 179 and other allowances).

The Hummer H2 at $50,590 (all 8,600 pounds of it!) is fully deductible, as are all other SUV's. The link lists other SUVs and trucks that qualify.

While some people are excited by this tax loophole, others aren't, because they argue that it encourages people who own businesses, but who don't need or use heavier vehicles in their business, to purchase them to deduct them. The first link estimates that if 100,000 people utilize this loophole, that it will cost the government about $1.5 billion in tax revenue.

As mentioned in my book, "How To Start And Run Your Own Corporation," Section 179 deductions typically flow through for S-corporations and other pass-through entities as a separate line item. This prevents shareholders in several S-corporations from deducting in excess of the maximum allowed under Section 179.

For example, if you own 100% of your own business and take the full $100,000 Section 179 deduction for assets it purchased, you aren't allowed to deduct another $100,000 for assets expensed via Section 179 by another S-corporation in which you’re an investor. You can't exceed the $100,000 maximum. Period.