Take Advantage of Business Depreciation Write-Offs for Your Small Business

Looking to start your own small business venture? Have you heard about the beneficent first year of business depreciation tax write-off that’s tailor-made for small business? Now entrepreneurs and small business owners can take advantage of the generous savings potential and tax benefit available with the expansion of Section 179.  Your business may be entitled to a deduction of up to $125,000 on tangible personal property assets and capital expenditures. This includes office equipment, furniture, fixtures, software and storage facilities.

[Related: 7 Overlooked Tax Deductions for Small and Home-based Businesses]

Ordinarily, the amount for property write-offs must be dispersed over several years as depreciation.  However, the IRS Section 179, allows business owners to fully expense purchases made during the first year of acquisition. Section 179 allows tax payers to get their entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset’s useful life–which can be up to 39 years. This is called first-year expensing or Section 179 expensing. To help you claim even greater tax benefits than previous years, Congress expanded the base level write-off to $100, 000 (up from $25,000) to a maximum of $128,000 for 2008, indexed for inflation for the last several years.  But remember, the deduction is not automatic.  When filing your tax return, you must complete Form 4562 for Depreciation and Amortization. Calculate your standard depreciation write-off using the cost remaining after subtracting your Section 179 deduction. You must file for the write-off in the current year as it is not retroactive unless you filed for an extension before the actual due date.

There are three obvious advantages to Section 179 and the amount saved is dependent on your individual tax category as an S Corporation, sole proprietorship or partnership.  First, deducting the full write-off amount in the first year means a larger tax deduction which translates to an immediate cash benefit. Second, long-term tax planning is also favorable to those whose income fluctuates yearly.  Taking the deduction during the year when you’re in a higher tax bracket may result in substantial permanent savings. Third, depreciating assets will no longer be an issue. It’s also important to note that “real property” such as buildings or inherited or rental property are excluded.

You can use Section 179 expensing only for property that you purchase–not for leased property or property you inherit or receive as a gift. It cannot be used for property purchased from a relative, corporation or an organization that you control, although it may be used or new. As with all tax benefits, there are disadvantages, so it’s important that you discuss the details and down-sides with your financial adviser or accountant before deciding if Section 179 is right for your venture.