Small Business Tax Deduction is Shrinking in 2012
Fourth quarter is the time to make equipment purchases!
It was recently reported that two generous tax breaks small businesses have benefited from during the recession are going to shrink substantially in 2012. Year end tax planning for businesses will be even more important than usual.
The changes affect deductions for purchases of equipment such as computers, vehicles and business phone systems. The tax breaks (Section 179 and “Bonus Depreciation”) were passed as an economic stimulus to help small businesses expand and make new hires. They are now slated to be scaled back in 2012.
If you’ve been considering a new equipment purchase, it may make sense to buy before the changes take effect. Deductions will be dramatically lower in coming years.
The Deductions and How They’re Changing
The Section 179 deduction allows a small business to deduct up front rather than depreciate the cost of business equipment. The deduction for 2011 is $500,000. In 2012, it will drop to a quarter of that. And in 2013, it’s expected to fall to $25,000 – the amount it was back in 2002.
Bonus depreciation allows small businesses to take a deduction for equipment expenses beyond the amount allowed under Section 179. For 2011, the bonus depreciation is 100 percent. In 2012, bonus depreciation drops to 50 percent.
Under normal depreciation rules, the cost of equipment is deducted over a number of years according to a formula set by the IRS. So the Section 179 and bonus depreciation provisions have given small businesses accelerated tax savings.
You can learn more about the deductions from IRS Publication 946, How to Depreciate Property. It’s also a good idea to discuss your plans with an accountant or tax attorney.
Think Before you Buy
Changes in the tax law shouldn’t be the biggest reason for buying new equipment. But if you are in the market for a new phone system or other equipment and have been debating whether to buy in 2011 or in 2012, it may make sense to move the purchase into this year.
If you can get a better price now than you would next year, that’s another reason to buy now. The equipment has to be up and running by December 31st. The good news is, it’s OK if you don’t pay for the equipment until next year, or if you’re going to take several years to pay it off.
The money that you’ll save on taxes can help pay for the equipment purchased. Sounds like a great reason for those seeking infrastructure improvements to make their move this year.
Portions of this article were excerpted from “Generous Small Business Tax Deduction is Shrinking in 2012” by Joyce M. Rosenberg, AP Business Writer.