The government is offering companies sizable tax breaks on their technology and equipment purchases — including the option of writing off all their technology and equipment spending in 2011 — thanks to two laws that were passed during the second half of 2010. Last September, President Obama signed the Small Business Jobs and Credit Act of 2010, which raises the Section 179 deduction from $250,000 to $500,000 for the 2010 and 2011 tax years. It also includes a 50 percent bonus depreciation for the 2010 tax year.
Section 179 lets small companies expense a percentage of their technology and other equipment purchases immediately, rather than use the normal depreciation schedule, which for hardware is typically five years. Section 179 places limits on how much money businesses can spend on equipment purchases and still qualify for the full $500,000 deduction. In addition to the 50 percent bonus on depreciation, the 2010 jobs act increases the spending limit from $800,000 to $2 million for the 2010 and 2011 tax years.
Now, businesses are allowed to spend up to $2 million on technology and other equipment before they begin to lose some of the $500,000 tax deduction. For every dollar spent above the limit, businesses must subtract the same amount from the deduction. For example, if a business goes $50,000 over the spending limit, they can deduct only $450,000.
In mid-December, President Obama signed a second tax package, called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which includes a 100 percent bonus depreciation with no spending limits for new assets acquired and placed in service between Sept. 8, 2010, and Dec. 31, 2011.
That means companies can write off the full cost of their new technology and equipment spending during the period, regardless of how much they’ve spent, says James Cravens III, partner at accounting firm Cravens & Cravens in Du Quoin, Ill. Equipment purchased between Jan. 1, 2010, and Sept. 7, 2010, still qualifies for a 50 percent bonus depreciation.
Cravens says the first tax law, which increases the Section 179 deduction and spending limit, is a boon to small businesses because it lets them deduct more equipment and allows some businesses that go over $800,000 in spending to qualify for the full deduction.
The second tax law, with the 100 percent bonus depreciation for new assets, affects primarily companies that spend beyond the Section 179 limits and lets them write off all their purchases made between Sept. 8, 2010, and Dec. 31, 2011. The bonus depreciation benefits mostly larger companies and some small businesses that have the budget to buy that much equipment, Cravens says.
“Your typical small [business] employer won’t normally spend $2 million in equipment, but if a small business does need to buy that much in equipment, this would be the year to take advantage,” he says.
The upshot: For most small businesses that spend less than $500,000 a year on new technology and equipment, the two tax laws give them two options to deduct the equipment all in the same year. “It’s two different ways to accomplish the same thing,” Cravens says. “For most small businesses, they can take Section 179 or take the 100 percent bonus depreciation; it doesn’t matter.”
If a business is losing money, it can still qualify for the bonus depreciation, while the Section 179 expense deduction is limited to the business’ taxable income. A business loss can be used to offset the taxpayer’s income from other sources, Cravens says.
How the Tax Cuts Work
Technology that qualifies for the Section 179 deduction or bonus depreciation includes computers, servers, networking equipment and off-the-shelf software. Office equipment and furniture purchases also qualify.
Small businesses should consult their accountants on whether to take the Section 179 deduction or the bonus depreciation. It doesn’t necessarily make the most sense financially to take the entire tax write-off up front, especially if the business is not generating huge profits and is in a low tax bracket for the current year, says Michele Hinderer, owner of Hinderer Tax & Accounting in Eagle, Idaho. Some small businesses might get more of a tax benefit if they use the normal depreciation schedule and spread the deductions over future (possibly more profitable) years.
Will the increase in the Section 179 deduction from $250,000 to $500,000 for the 2010 and 2011 tax years make a difference to your company?
55% No, we spend less than $250,000 annually on equipment.
24% This is news to me; I plan to research the benefits of this tax cut.
12% Yes, it may spur us to buy more equipment.
9% Yes, we will spend or plan to spend more than $250,000 in technology and equipment in 2010 or 2011.
SOURCE: CDW poll of 384 BizTech readers
With the two new tax laws, small businesses have multiple options for writing off their new technology and equipment purchases. It gives companies — particularly those that spend more than $500,000 on equipment — different tax options, depending on what is most advantageous to them, Cravens says.
“This gives companies greater flexibility and allows them to not worry about capital expenditure limits under 179,” he says. “They can purchase the new equipment they need without fear of not being able to write it off in one year.”
First, they can deduct the equipment under the regular depreciation schedule. Second, they can write it off using 50 or 100 percent bonus depreciation, depending on the date it was purchased. And third, they can use Section 179 alone or combined with one of the bonus depreciation methods. With the third option, they get to write off all or part of the equipment at once, and they can deduct any remaining costs under the normal depreciation schedule.
For example, if a company buys $1 million of new IT equipment in the current year, $500,000 can immediately be deducted under Section 179.
Of the remaining $500,000, the business can deduct the rest either through a 100 percent bonus depreciation or under the normal depreciation schedule — depending on the type of equipment and life of the assets. If the equipment is depreciated over a five-year period, for example, businesses can deduct $100,000 of the remaining $500,000 in the first year. As a result, the immediate first-year deduction and depreciation is $600,000.
Genesis Nelson, who owns Anytime Fitness clubs in the Boise, Idaho, area, has taken advantage of the Section 179 deduction every year since she opened her first club in 2005. And she plans to do so again this year as she expands to a sixth location.
Her biggest investment is on gym equipment, but she also equips each location with two computers, four or five large-screen flat-panel TVs and a camera surveillance system for security. When opening a new gym, she spends $100,000 to $150,000 on gym equipment. Every year, she also replaces old equipment or adds new equipment at her other locations.
The tax-deduction increase from $250,000 to $500,000 a year — and the bonus depreciation — won’t make a difference to Nelson because she spends less than that on equipment, technology and furniture each year. But overall, as a small business owner, the tax cut is a huge benefit because it’s helped her business grow, she says.
“It’s helped me with the down payment for the next club, and it’s helped me hire more people,” she says.