Repair shops can now take full advantage of a first-year tax write-off for newly acquired equipment, due to the Small Business and Work Opportunity Tax Act of 2007. Under Section 179 on first-year expensing, shop owners can write-off up to $125,000 of the cost of equipment in one year (rather than depreciating that equipment over several years).
This significantly more generous tax break is not only extended through 2010, but it is also indexed for inflation. The deduction is phased out for qualifying purchases above $625,000. Apart from this, thanks to Section 179, repair shops can spread out equipment purchases as needed over the next few years, rather than try to cram all their major purchases into 2007.
Please note that the phase-out begins when a repair shop buys $500,000 in equipment in a tax year. Since it is a dollar-for-dollar reduction, there is no write-off if total purchases exceed $625,000. And, it is true "total purchases" made by the operation, not merely those that qualify.
Property that pays
Instead of having depreciation deductions spread out over a number of years, tax rules allow shops with sufficiently small amounts of annual investment to choose to deduct, or expense, those equipment and property acquisitions.
Expense deductions, or immediate write-offs, are available to shops that treat newly acquired equipment and property as an expense rather than a capital expenditure. In general, lawmakers, and the IRS, describe property qualifying for this immediate deduction as "depreciable tangible personal property that is purchased for use in the active conduct of a trade or business." Most equipment acquired for use in a business can either be depreciated over its useful life, or expensed immediately under Section 179.
Air conditioning and heating units are specifically excluded as Section 179 property. On the flip side, property that may be written off includes machinery and equipment, furniture and fixtures, most storage facilities and off-the-shelf computer software.
Section 179, the baseline
Before last spring's passage of the Small Business and Work Opportunity Tax Act of 2007, the maximum amount permitted to expense under Code Section 179 was $100,000 of the cost of qualifying property. Under the new law, the base $100,000 limit has increased to $125,000 for tax years beginning this year through 2010.
The Section 179 first-year expensing election is not for unprofitable shops of any size. The total cost of property that can be expensed in a tax year cannot exceed the amount of taxable income derived from the business during the tax year, including salaries and wages. Although the Section 179 rules specifically deny the expensing deduction to shops with insufficient income, this does not rule out those shops with low but growing profits.
Section 179 deductions are not automatic. Business owners or managers who want to take the deduction must elect to do so. Generally, election is indicated on the form for depreciation. For tax years beginning in 2003 through 2009, a repair shop owner or manager may make, revoke or change an election without the consent of the IRS on an amended return.
Again, the total cost of property that may be expensed in any tax year cannot exceed the total amount of taxable income derived from business during the tax year. An amount disallowed as the result of the taxable income limitation may be carried forward to a more profitable tax year.
Decide what's right for you
Despite the lure of a complete write-off for newly acquired business property, Section 179 write-offs are not for every shop. It's important to remember that first-year Section 179 expensing write-offs are optional.
Depreciation deductions create a write-off against the higher income of later years, where it might be more rewarding.
An operation's owner or business manager (or tax preparer) should decide whether the business would benefit from an immediate tax deduction for the cost of newly acquired equipment vs. smaller depreciation deductions in later, more profitable years.
A repair shop showing only a small profit, getting through a slow year or growing rapidly might be better off ignoring the Section 179 expensing election in order to depreciate those costs.
Mark Battersby is a nationally syndicated tax and financial columnist and book author.