Your tax fantasy

Imagine an IRS rule that allows you to immediately deduct the cost of almost any asset you need, regardless of the asset’s useful life.

Computers?  Deductible.  
Furniture? Deductible.
Software?  Deductible.  
Section 179 allows you to buy assets and deduct them immediately on your tax return this year.
Now, be forewarned that the IRS set limits on some assets’ deductibility (such as automobiles) while others are completely excluded from Section 179 (real estate and air conditioners).  Businesses typically can’t deduct more than $500,000 worth of assets in a year.
How to take advantage of Section 179
For existing assets, check the IRS instructions to see if they qualify (most do).  If they qualify, congratulations!  You can deduct them as expenses right now.
For assets you would like to buy, take the following quiz.
  1. What assets do you need?  (not want!  need!)
  2. Which of the assets qualify under Section 179 (Read the IRS instructions carefully.)
  3. Check out your income – does it look like you’re going to be profitable in 2012?
  4. Check out your cash flow – do you have the money to buy the assets before year-end?
If you answered yes to all four questions, go out and buy all the qualifying assets that you need, and that you have enough cash flow to pay for.  Don’t buy so much that your business will earn a net loss – this could create problems.

For example, suppose you have your eyes on a new MacBook.  With printer, software, sales tax, etc., it would cost you $3000.  You look it up in the instructions and BINGO! It qualifies!  You expect to have $5,000 income this year, and you have sufficient cash to pay for it.  Go for it!  Your taxable income will drop from $5,000 to $2,000, and in all likelihood your business’s income tax will drop by 60%.

One more thing: Remember that  “deductible” items usually lower your taxes – in effect, the government subsidizes a portion of them.  However, “deductible” doesn’t mean free.  Never spend money on assets that you don’t need.

Now you see why Section 179 is my very favorite section of the tax code.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

2 Responses to “Your tax fantasy”

  1. Thanks for the tip. This is great!

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