Tax Guru-Ker$tetter Letter

Wednesday, September 24, 2003

Section 179
The newly increased limits on the Section 179 expensing election have generated some confusion. One is the effective date, mainly for corporations that have fiscal years ending in a month other than December, which is how I advise most of my C corp clients to set theirs up. Since almost all of my C corp clients are wisely using a non 12/31 fiscal year, I have had to break the bad news that the tax returns I am now preparing, for years ending in 2003, have a Section 179 limit of $24,000. The new $100,000 limit will apply to the next year, that starts in 2003 and ends in 2004.

There is also some confusion regarding the purpose and benefits of the Section 179 expensing election, such as in this email I received last week from a reader:

With the new limit of $100,000 to expense equipment - - - -

Is my understanding correct that you can only expense items purchased up to $100,000 so long as it does not result in a negative or loss for the business. Any amounts that can not be expensed must then be depreciated as normal over their life. If this is truly the case - what good does that do for the small business guy - who does not make enough to expense anywhere near that amount against?

My response:

You are correct that the Section 179 expense allowable in any single year is limited by the overall taxable income. Any excess can be carried over to future years; or what often do, is opt out of the Sec. 179 and claim normal depreciation, that often gives a higher net loss, which can be carried back to recover previously paid taxes.

The reasoning and potential benefit behind having larger immediate deductions for new equipment purchases is to avoid the situation where a small business owner has plowed all of his/her profits and liquid cash into those purchases. If they are not immediately deductible, there could be a paper net taxable profit; yet there might be no cash left with which to pay the taxes. This kind of thing does happen a lot, plus situations where there is a paper taxable profit, but because the owner used all of the available cash to stock up on inventory (not deductible until sold), there was no money left to use to pay the taxes. Including the cost of new equipment along with other operating expenses does usually give a better representation of net cash generated from the business and thus makes it easier to pay the taxes on any net income.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/24/2003 12:38:00 PM Send this post: