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Max out on Section 179: Charge it!

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in Small Business Tax,Small Business Tax Deduction Strategies

The Section 179 deduction is as good as it’s ever been. The American Taxpayer Relief Act of 2012 (ATRA) extended the maximum allowance to $500,000 through tax years beginning in 2013.

Strategy: Stretch to buy extra equipment this year. It may be your last shot at those extra-generous Section 179 deductions for the near future.

You might have to borrow money to buy the equipment if your business doesn’t have the cash on hand. The tax law permits you to write off the full amount of the cost—up to the stated annual limit—even if you finance the purchase.

Example: Your business needs $200,000 to buy new machinery, but it can only afford to pay $50,000 out of the company funds. So you borrow the remaining $150,000 for the purchase. Generally, you can deduct the entire $200,000 under Section 179 even though the financed portion is three times your cash outlay.

Just make sure you have all your ducks in a row. There are two main limits to contend with:

  1. The Section 179 deduction can’t exceed your taxable income from the business (calculated before any Section 179 deduction).
  2. The Section 179 deduction phases out on a dollar-for-dollar basis for amounts above a specific annual threshold. For 2013, the threshold preserved by an ATRA is a lofty $2 million.

Tip: Without further legislation, the maximum deduction will plummet to $25,000 for tax years beginning in 2014 with a phaseout threshold of only $200,000.

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