NEW YORK — Tucked inside the mammoth tax and spending bill passed by Congress this month is a much-anticipated provision that will lock in a large tax break for small-business capital investments that has been temporary until now.
The break is intended to make it more affordable for small companies to buy up to $500,000 a year worth of equipment like computers, machinery and vehicles.
Known as the Section 179 deduction, the tax provision allows qualifying capital items to be written off immediately on a business’ taxes, instead of being depreciated over a number of years. That has the effect of lowering a business’ taxable profits, sometimes significantly.
The deduction is essentially limited to small and midsize companies. It begins phasing out when a company spends more than $2 million a year on qualifying purchases, and is eliminated entirely for those that spend more than $2.5 million.
Jerry Kortesmaki, the owner of London Road Rental Center in Duluth, Minn., relies on the deduction to stock up on equipment for his machinery and party supplies rental business. This year, he is using it to help pay for some $200,000 in new goods, including chairs, a mini-excavator, four trailers, an insulation blower and a sewer camera.
“I’ve been able to grow my company very quickly because I’ve been able to reinvest whatever I made in buying more equipment to rent,” said Kortesmaki, who has 11 full-time workers at his 13-year-old company.
The deduction works like this: If a company has a $90,000 profit and decides to spend $50,000 of it on new computers, the company would normally write off the cost of the equipment gradually, deducting a portion of it each year over the span of the computers’ useful life. But Section 179 allows the business to deduct the entire $50,000 cost at once in the year the equipment is purchased, reducing the company’s taxable profit to $40,000. (The deduction cannot exceed a business’s total net income.)
Nearly all small businesses, even the very tiniest, should consider taking advantage of the deduction, said Tanya Ouellette, an accountant with Raiche & Co. in Dover, N.H.
“It doesn’t have to be a huge piece of equipment,” she said. “I tell my clients, ‘If you bought a new Apple laptop, we’re going to take a 179 on that.’ ”
Section 179 was once a fairly limited tax break, with an annual cap of $25,000 or less. But in 2003, Congress temporarily raised the limit to $100,000, and in 2008, as the recession set in, it raised the cap again to $250,000. In 2010, hoping to stimulate more spending, Congress increased the limit to $500,000, allowing businesses to use the deduction toward expensive items like factory machinery and trucks.