Is it Time to Invest in Your Business?

At the end of 2011, a window of opportunity is closing for many small to medium-sized businesses. That is when the increased level of Section 179 deduction expense is scheduled to drop from $500,000 to $25,000. Section 179 has been in existence for many years and is designed to encourage small and medium-sized businesses to invest in capital equipment.

Since the early-2000’s, increasing the maximum Section 179 deduction has been a “go-to” method for Congress to help spur the economy. The latest increase to the deduction was included in the “Small Business Jobs and Credit Act of 2010” signed on September 27, 2010. The provision is applicable to tax years 2010 and 2011 for property acquired before January 1, 2012. After January 1, 2012, the Section 179 expense deduction is set to return to $25,000—the 2003 level.

Section 179 allows a business entity the opportunity to immediately expense a capital equipment purchase in the year it is acquired up to the Section 179 deduction limit and up to the point where the entity has taxable income (deduction may not produce a taxable loss). To ensure that Section 179 benefits only small and medium-sized businesses, the deduction phases out when capital expenditures exceed the statutory maximum.

For tax years 2010 and 2011, the Section 179 deduction is $500,000 and begins to phase out when capital expenditures exceed $2,000,000. The ability to immediately deduct the expenditures enhances the after-tax-cash-payback of an investment by “front-loading” the cash flow provided by the immediate deduction. This benefit can often reduce the after-tax-cash-payback by several months. At the time I am writing this, there are approximately four months remaining for businesses to order, install, test and begin production using Section 179 property in 2011.

There are specific requirements that businesses must follow to take a Section 179 deduction, and even when a business qualifies for the deduction, it may choose to forego the deduction for other tax reasons.