© by Fred W. Daily

Regular tax code rules dictate that major equipment purchases of a small business be tax deducted over a number of years—not all in the year purchased. For example, a new computer ordinarily must be deducted over six years. The first and sixth years, you only get 10% of it's cost as a business expense. In the second through fifth years, a 20% deduction is allowed. Never mind that the computer might well be outdated in a couple of years; that's how the stingy tax law works. Listen up, I am going to tell you about a "loophole" that allows a 100% deduction in that first year, and you don't have to spend a dime!

Small business owners don't need to learn the tax code by section number but there is one to remember: IRC 179. This is perhaps the best self-employed tax break of all. Section 179 allows—but doesn't require—a deduction of up to $18,500 (1998) of asset purchases to be deducted along with current expenses like rent or the light bill. This is known as "expensing" an asset. A few years ago I bought a new $7,000 copier and started cranking out copies on December 31, and deducted the whole $7,000 in that year. What's more, I bought it on the installment plan with zero money down! My immediate tax savings—over $3,000 off my federal and state income taxes. Perfectly legal, I assure you.

The fine print: not everything bought for your business qualifies for IRC 179 fast write-off. Vehicles are covered by special rules. Real estate or improvements to it, never qualifies for IRC 179. And, that computer or cell phone must be used more than 50% of the time for business—excessive personal use is a no-no. As you might expect, the percentage of any personal use reduces the amount of the Section 179 deduction. For example, Joan bought a $3,000 computer system that she uses 60% for her consulting business, and 40% for personal things, like financial management. Her 179 deduction is $1,800. Last, but not least, determine whether or not you fully benefit by using IRC 179. If your venture is young, and has little or no revenue, it may be better off to spread out the deduction over a number of future profitable years, using regular tax code depreciation rules.

For a complete explanation of what you can—and can't do—see my book Tax Savvy for Small Business published by Nolo Press.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

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