We’re have already wrapped up 2016 and are focused on taxes. If you’re a small business owner, we want to know: Have you taken advantage of Section 179 yet?
As you may have heard, and even if you haven’t, you need to get together with your accountant and discuss why. The end of 2015 was marked by the U.S. Congress passing a massive $1.8 trillion spending measure that included making permanent a tax deduction for small and mid-sized businesses.
The tax break is a big deal for a couple of reasons. One, it’s fairly large and quite useful: It allows up to $500,000 worth of qualifying equipment a year to be written off immediately, rather than depreciated over time. This can significantly lower a company’s taxable profits and allows more money to go into reinvestment than into the government’s hands.
And two, the deduction is permanent, which eliminates the uncertainty that business owners felt for years about making capital investments. Would the tax break survive another year? As Congress tends to do, the decision to renew the deduction (and increase the spending limit) was made at the last minute in recent years. This left people in limbo, unsure of whether they should be spending big in the last days of the year or if they could wait until the following quarter. There will be no more guessing games now.
The New York Times did a good job of explaining how the break works when it was first made permanent in December 2015:
Related Article: How To Prepare Your Small Business For Tax Season
The deduction works like this: If a company has a $90,000 profit and decides to spend $50,000 of it on new computers, the company would normally write off the cost of the equipment gradually, deducting a portion of it each year over the span of the computers’ useful life. But Section 179 allows the business to deduct the entire $50,000 cost at once in the year the equipment is purchased, reducing the company’s taxable profit to $40,000. (The deduction cannot exceed a business’s total net income.)
To understand how truly useful writing off that much equipment right away can be, let’s take a second to remember what “equipment” means for a small business. We’re talking about all kinds of fixed assets here—the long-term pieces of property used in the production of income. That definition is broad and includes (but isn’t limited to): computers, tablets, mobile devices, office furniture, vehicles, office equipment like printers and scanners and large manufacturing tools.
As you know, things like computers and vehicles aren’t cheap. When you buy them, you expect to have them for at least a year, if not much more. And when you buy an asset for use in your business, it needs to be depreciated on both the company balance sheet and income tax statement. Depreciation is how businesses allocate the cost of an asset over its expected useful life. Once the asset has been depreciated, it’s time for a replacement.
But depreciation is an expense, which reduces the company’s taxable income. If you buy $50,000 worth of assets and are able to write them off right away, that’s $50,000 that goes towards the growth of your business and isn’t subject to taxation. See why many business owners were eager to see the limit on Section 179 raised, and made permanent? Back to the NYT:
Jerry Kortesmaki, the owner of London Road Rental Center in Duluth, Minn., relies on the deduction to stock up on equipment for his machinery and party supplies rental business. This year, he is using it to help pay for some $200,000 in new goods, including chairs, a mini-excavator, four trailers, an insulation blower and a sewer camera.
“I’ve been able to grow my company very quickly because I’ve been able to reinvest whatever I made in buying more equipment to rent,” said Mr. Kortesmaki…
Small business owners have it tough enough as it is—not taking advantage of every perk could mean the difference between success and failure. This leads us to a larger question about asset management and depreciation: Are you using all the tools available to you to save money, streamline efficiency and improve the lives of your employees?
Here’s why we ask: According to the 2016 State of Small Business Report, a whopping 55 percent of small business owners surveyed admit that their company either doesn’t track assets or uses a manual process to do so. Considering we live in an age of instant communication, instant take-out orders, instant coffee (which, to be fair, is gross) and instant collaboration, the fact that some companies are choosing to operate without readily available information on the state of their biggest investments is mind-boggling.
Asset management software and systems do an excellent job of not only tracking the physical location of your assets (a barcode or RFID check-in/check-out system is a good way to hold employees accountable and prevent misappropriation, misplacement or theft) but of automatically depreciating them. Quality systems can use any number of methods of depreciation (there’s straight-line, declining balance, units of production, sum of the years digits and more) to keep you tax-compliant. They can also alert your team to perform maintenance and upkeep on a regular basis, so you don’t suddenly find yourself with an inoperable asset when you need it most.
A fixed asset management system is particularly helpful in this context, since companies can keep two sets of records—one that goes to the IRS and one for the general ledger. They can use different methods of asset depreciation for each if that’s easier. So when a company uses Section 179 to write off a new asset and immediately depreciate its value to the IRS, they can continue tracking its standard depreciation for company use and never lose sight of that asset’s maintenance schedule and eventual disposal.
A good accountant and/or tax lawyer is important for identifying potentially unknown deductions like Section 179 (among many other things). But they can’t supervise the purchase, tracking, depreciation and disposal of every asset you buy. If you’re going to be investing heavily in your company via assets, it’s only right to track them with an automated system that doesn’t send your employees scrambling for a replacement part on the fly or comparing two sets of bookkeeping records to make sure the company isn’t going to get audited. Our advice: Take advantage of tax breaks, and take care of whatever you buy. Simple, yet effective.