Tax Idea: Fund Your Business Expansion With Pre-Tax Money
When we use an asset (furniture or real estate) in the business, the purchase cost of that asset is not considered an operating expense for the business. However, since the asset is used to produce income and loses its value over time, the tax law allows us to deduct a reasonable allowance each year for depletion, wear and tear on the property. The provision is distributed over several years (based on the approved useful life of the asset).
Section 179 allows most taxpayers, who choose, to treat the cost of qualified property as an expense rather than a capital expense.
This means that if you buy an asset for your business in 2011 and it is supposed to last for many years and produce income for your business, you can deduct the entire cost of this asset on your 2011 tax return.
This is a very attractive deduction, if we study its dynamics a little more. However, before we go into more detail, let’s discuss the limits of these deductions, as it’s pretty impressive to ignore them.
The maximum allowable deduction under Section 179 was $250,000 per year for 2008 and 2009. For tax years beginning in 2010 and 2011, this deduction was increased to $500,000.
The big news is that it expires on December 31, 2011. After that, the deduction limit is reduced to its original limit of $25,000 (not a typo: it would be reduced to $25,000).
Let’s see how this would be a great benefit to your business without an additional cash outflow.
If you have future growth plans and anticipate needing additional equipment for your business in 2012, you may want to consider purchasing it in 2011. If carefully structured, you can end up cash flow positive with the entire Section. IRS 179 deduction offer.
For example, if you want to buy $250,000 worth of equipment and if you can get financing for it, or you can structure it as a capital lease, you would end up putting a small amount toward the purchase of the equipment.
If you have to make a down payment of 10%, that is, $25,000, it means that you received $25,000 in cash towards the purchase of the equipment.
As a result of this purchase, with a 10% down payment, you would now have a $250,000 deduction to report on your tax return. Depending on the tax rate of his business, he would most likely end up with positive cash, since his $250,000 deduction would result in a tax savings greater than the $25,000 he invested for the equipment purchase.
If you need to buy equipment in 2012, consider buying it now
Therefore, 2011 is the most opportune time for businesses to invest in business assets that would qualify as Section 179 assets and deduct them from their returns.
This deduction expires in 2012 and therefore you will miss out on this important opportunity.
Even some real estate is included
One of the most surprising parts of this provision is that the IRS has even included some real estate in the category of qualified assets. This particularly includes restaurants and some leasehold improvements.
It would be a great loss for those who have growth plans if the deduction is not taken.
For those businesses that plan to grow in the coming year and plan to purchase equipment, it is critical that they consider evaluating this option and hopefully save a lot of money on their taxes.