Here’s the lowdown: of the tax code says business taxpayers can elect to currently deduct, or “expense,” a certain amount of business assets purchased and placed in service during the year. In 2003, Congress quadrupled the amount you could deduct under Section 179 from $25,000 to $100,000. Subsequent inflation adjustments pushed that limit higher. For calendar-year 2005 tax returns, the maximum allowance is $105,000. For 2006, it jumps again to $108,000. If you have any equipment costs left over, tax laws allow you to depreciate the balance under the regular MACRS rules.
Two key limits: The Section 179 deduction is wide open to most taxpayers. But you should plan around two important limitations.
- Annual business income limit. The expensing deduction can’t exceed the net taxable income from all the businesses that you actively operate. (Net income is figured without regard to expensing, the 50 percent deduction for self-employment tax and any net operating loss carry-forwards or carry-backs.)
- Annual dollar cap. If equipment placed in service during the year exceeds an annual threshold ($420,000 for 2005 and $430,000 for 2006), the maximum expensing allowance is reduced on a dollar-for-dollar basis. Bad news ahead? Be aware that both dollar limits are scheduled to revert to lower figures. After 2007, the maximum allowance returns to $25,000, while deductions will be reduced for purchases above $200,000. That means, unless Congress intervenes, you only have two years left for six-figure Section 179 deductions.