Let me confess right up front, new legislation that alters the tax code just baffles me. I often wonder if the legislators, accountants and lawyers who write this stuff, ever realize how confusing it can be to the little business owner trying to survive a tough recession. In fact, I think this is why this new bill got such a tepid response from the business community, since no one could figure out “what’s in it for me."
In a nutshell, the bill provides $12 billion in tax breaks. It also created a new $30 billion fund that is supposed to provide more capital to small banks so that they can lend to more small businesses. Whether lending starts to happen seems to be a matter of great debate and depends on which party you listen to. However, here is my take on one of the best elements from the bill. But be aware, I am neither an attorney nor an accountant, so please check with your advisors before doing anything!
Congress raised the limits for eligible investment write-offs from $250,000 to $500,000 for tax years 2010 and 2011. What investments are covered by the new law? It is all spelled in Section 179 of the tax code. OK, if you are like me, what exactly does that mean? I went to the horse’s mouth or in this case, publication 946 from the IRS site.
“To qualify for the section 179 deduction, your property must meet all the following requirements: It must be eligible property, must be acquired for business use, must have been acquired by purchase (no gifts, no inheritances) and most importantly, it must not be property described later under What Property Does Not Qualify.”
OK, still confused? What is eligible property? Back to the IRS site: To qualify for the section 179 deduction, your property must be one of the following types of depreciable property: 1) Tangible personal property, 2) Other tangible property (except buildings and their structural components) used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, 3.) Single purpose agricultural (livestock) or horticultural structures, 4.) Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum and 5.) Off-the-shelf computer software.
Basically, to qualify, it must be eligible property but not real estate – think machinery and vehicles. Prior to the passage of the bill, the expensing limit would have been $250,000 not $500,000 this year, and only $25,000 next year. If you were planning to make a major purchase, and you meet the criteria, this could be a substantial savings.
Another benefit of the new legislation is the extension of 50% bonus depreciation which had expired at the end of 2009. Now bonus depreciation has been reinstated for the remainder of 2010 with some elements continuing into 2011. Qualified property with a recovery period of 10 or more years or transportation equipment will benefit from these rules in 2011 too. The good news is that this rule applies even if you made the purchase earlier in 2010 before the bill was approved by Congress.
Hopefully this blog didn’t cause your eyes to glaze over, however there are some significant aspects to this legislation that every business owner should understand.
About Peggy McHale
Peggy is the co-founder of Consultants 2 Go®(C2G), a consulting firm that provides marketing solutions to Fortune 500 companies in the Financial Services, Telecom and other industries. In 2006, Consultants 2 Go, was one of twenty winners of the 2006 Make Mine a $Million Business program and was one of seven to be named to the Million Dollar Club. Prior to starting C2G, Peggy was a Vice President at American Express. She holds and MBA from St. John’s University and a BA from the College of Mount Saint Vincent.