Among its many facets, the act extends the Section 179 equipment deduction and expands bonus depreciation through the 2011 tax year. To put the tax code into perspective, Lucy Sutton, our managing editor for Baking & Snack's Operations Update, reached out to Mark French, president of Crest Capital, a national equipment finance lender headquartered in Atlanta, GA. Together with other accounting and finance professionals, Mr. French is one of the founding contributors of section179.org, a nonprofit website offering small businesses information and advice in dealing with the Section 179 deduction.
Here, he discusses how companies can take advantage of the new law, especially when it comes to making capital investments during the next year.
Operations Update: What is Section 179, in layman's terms?
Mark French: Section 179 is a section of the IRS tax code that allows a business to immediately write off the cost of equipment and software in the tax year the business acquires it, as opposed to — without Section 179, you would have to book it as an asset [and] depreciate it typically over five to seven years.
Is Section 179 limited to small businesses?
It's not limited to small businesses, but it impacts small businesses more because of the limits. The limit is $500,000, after the most recent adjustment to the tax code. Above $2 million, they reduced the deduction dollar for dollar after you exceed $2 million. That's why a lot of people think that it's specifically for small businesses. It's not; it's for all business, but it does have limitations, and only large businesses might meet those limits.
What's the difference between the $500,000 and the $2 million limits?
Under Section 179, a business can immediately write off up to $500,000 of equipment and/or software that it acquires in the 2011 tax year. If a business happens to acquire more than $500,000 of equipment and/or software in 2011, the business can take 100% bonus depreciation on any additional amount above the $500,000. If a business acquires more than $2 million in 2011, the Section 179 deduction is reduced by the exact amount the business exceeds the $2 million limit. Therefore, businesses will elect 100% bonus depreciation on any amount above $500,000.
Although a business of any size qualifies for Section 179, many large businesses exceed that $2 million cap, while most small/medium-sized businesses never come close to exceeding the $500,000 cap on regular 100% Section 179. The rationale of Section 179 is targeting small & medium businesses with an incentive to acquire equipment now rather than wait for the economy to fully recover. Here’s a calculator that you can play around with actual example dollar amounts.
Can you explain bonus depreciation?
Originally, Section 179 targeted small business by allowing 100% write-off of equipment cost under $500,000, but Congress also incentivized larger businesses by allowing a 50% write-off (referred to as “bonus depreciation”) on equipment cost above the half-million-dollar limit. With the recent passage of the Tax Relief Act of 2010, bonus depreciation was increased to 100% of equipment cost to give big business the identical incentive small business has to add equipment and get the economy moving.
In 2011, the only real difference between Section 179 and bonus depreciation is that only new equipment qualifies for bonus depreciation, while both new and used equipment qualify for Section 179. Most businesses will take regular Section 179 on the initial $500,000 spent on equipment, and 100% bonus depreciation on any amount above that. The exception is an unprofitable business that has no taxable income in 2011 will use bonus depreciation because the loss can be carry-forward to a future year that the business owes tax.
What equipment qualifies for the Section 179 deduction?
Anything you would capitalize on a balance sheet, so any equipment that's used in business. It can be used equipment; if you acquire used, it still qualifies. We get that question a lot. There's really no limitation; it just has to be for business use and it has to be new to that business during that tax year.
Are there any limitations of Section 179 of which baking industry professionals should be aware?
It's really intended globally for all businesses. It's something that should be more attractive to the bakery industry than it is, and I think it's because of lack of industry awareness of the deduction in general. We see it in other industries like machine tools. Any kind of industrial, high-equipment-intensive industry has more knowledge of this section than bakery.
Does the Section 179 deduction apply to leased equipment as well as purchased?
It does. You could finance with a loan or a lease, or you could pay cash; it doesn't matter. A lot of businesses will use financing because it creates a temporary positive cash flow for about the first 17 months in general.
What do company managers need to do to take advantage of Section 179?
Basically acquire equipment before the end of the given tax year. From there, it's a simple form — Form 4562 — it just details the assets you put into place in that calendar year.
Is that form simple enough for everyman to fill out?
A lot of small businesses like Sub-S, LLCs, they're able to do it themselves. But any CPA is familiar with it.
And is the cutoff Dec. 31?
It would be if your tax year is Dec. 31. So whatever your year end for your tax return for the years 2010 and 2011, that would be your cutoff.
What records should business owners keep?
You would want to keep the evidence of payment and the original invoice from the seller of the equipment.
Is there anything else baking business owners should know about Section 179?
One other thing that I think everyone should realize is that software is also covered under Section 179 — any kind of software that we call "shrink-wrapped" without 100% customization. You can't use it for a website, but you could use it for, let's say, custom software you're using in your business. It could be accounting software, marketing software, production software — that can all be deducted.