Did you ever wonder why so many small business owners drive large SUV’s?
It’s not because they need a big vehicle to project a big image or that they are trying to drive Al Gore crazy. Nor is it because they are selfish, environmentally-unfriendly individuals who would just as soon run over a spotted owl on their way to a “let’s dump the toxic waste on the baby seals” rally.
Those are inaccurate stereotypes, and for the record, it was an impromptu gathering, not a rally…
Seriously, many small business owners drive an SUV for one simple reason: the IRS has made it financially beneficial for them to do so.
Section 179 of the US Tax Code. This is a little known incentive in the US Tax Code meant to spur the economy by encouraging small businesses to make large equipment purchases this year.
What is Section 179 and how does it work?
Section 179 is a provision to the US Tax Code that allows certain types of equipment purchases to be written off, in full, the year of the purchase. For many businesses, this is a fairly large incentive to make a large purchase now, as the tax savings are substantial. This is precisely what the government has in mind – more equipment purchases by businesses in the current year.
Essentially, Section 179 works like this:
When you normally buy certain pieces of equipment for your business, you get to write them off a little at a time through depreciation. In other words, if you spend $25,000 on a vehicle, you get to write off (say) $5000 a year for five years (these numbers are simply an example.)
While it’s true that this is better than no write off at all, most business owners would really prefer to write off the entire purchase price of the equipment for the year they buy it. In fact, if a business could do that, they might be more willing to buy a new vehicle this year, instead of waiting.
Section 179 allows small and medium sized business owners to do exactly that.
Instead of taking a $5,000 deduction a year for five years, a business owner spending $25,000 on a new SUV that qualifies can deduct the entire $25,000 this year, substantially lowering the business tax bill.
So why an SUV? Why not a small, Owl-friendly sedan?
To utilize the advantages of section 179, the equipment in question must meet certain criteria, one of which for vehicles is those that have a gross vehicle weight (GVW) of over 6,000 lbs. Many larger SUV’s meet this criterion, making them a very popular year-end purchase.
We say “year-end” because this is when business owners think of taxes. If a business is going to have a tax bill anyway (and most do), buying a new piece of equipment under section 179 can actually lower that tax bill quite a bit. Especially if the equipment is a large-ticket item (like a vehicle).
Act Now – if you own a business!
The government is constantly changing the tax code, so who knows if section 179 will be around for long. More importantly, you can get the full benefit on this year’s tax return if qualifying equipment is acquired prior to December 31st – Thus, it makes sense to buy now.
The above captures the general idea of Section 179. However, there are currently several other boundaries regarding Section 179 (like a $125,000 limit on write-offs, a $500,000 ceiling on purchases, certain restrictions on vehicles, and a few others), so make certain you know the full scope of the code before you make your purchase.
Want to know more about section 179?
To learn more and get answers to any questions, go to www.section179.org visit www.irs.gov, or consult your tax advisor.