Section 179 benefits are lowering in 2013 – Should you upgrade computers before the end of the year?
I was just watching an interesting seminar on the changes that could affect small businesses with the approaching “financial cliff”. Of the many topics covered, the one that caught my attention was the reduction of the IRS Section 179 Expensing regulations.
To me, computers, servers, and software, along with other office equipment like copiers, mail machines, etc., seem like basic business needs. At Mavidea we spend all day working with customers to make sure their systems are functional and optimized for maximum productivity. When the occasional problem does arise, a lot of users are unable to do their jobs. Basic business, right?
Unfortunately, as most small business owners know, the IRS doesn’t see it that way. Computer equipment is considered a capital expense and has to be depreciated out over 5 years and software has to be done over 3 years. The owner pays the money for the equipment, but only gets a fraction of the business expense each year.
There was some relief though. In 2010, President Obama and Congress signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. That bill did a lot of things, but for the purposes of this blog, what we care about was a one year extension of for Section 179 expensing. The limit was $500,000. Basically, they were trying to encourage spending by saying “Look, if you buy stuff now, we [the US Govt.] will let you take the entire purchase price as an expense right now instead of depreciating it.” After a rocky 2008 and 2009, the government was hoping businesses would buy trucks, machinery, and yes, computer equipment that they and it would help kick start the economy. This was good news, and a lot of Mavidea customers jumped on it.
For 2012, the benefit dropped down to $139,000 which is still a pretty good amount. At Mavidea we just bought new cubicles for our tech and web staff, and we will be using the Section 179 benefits to write all of that off. However in 2013, the benefit drops down to $25,000. Depending on your business, this might not even put a dent in your needs, and it will be back to depreciating you will go.
So what to do? There are a couple of options:
1. Purchase the equipment think you will need for next year before the end of 2012. Computers, servers, and networking equipment have a 4-5 useful life to them. Other things Mavidea can help you with a new scanner/copiers that will lower your price per printed page, or the commercial displays you have been looking at to increase brand awareness for people coming into your offices. You get the full tax benefit.
2. Consider financing any of the above equipment. I know most people don’t like the idea, but it could be the smartest financial move you make all year. You get the benefit of taking the full purchase amount as a tax deduction this year, but only have to slowly pay for the equipment over 36 or 48 months.
Financing works like this – say your server needs to be replaced because it is currently 5 years old, and you want to plan on getting new laptops or desktops with Windows 8 and Office on them for all 10 of your employees so that everyone is current and up to date. The whole project works out to be about $16,000.
– Normally for your first year you get to deduct $1400.00 (assuming 4 year depreciation and a 35% tax bracket).
– With the Section 179 benefits you can deduct the full amount of $5600.00 this year while also lowering your taxes.
– Your effective equipment cost after tax savings would be $10,400!
– Your estimated financing payment would be $560 per month, which means the first 10 months of payments would be covered by the tax savings, while your employees were more productive the entire time!
I am not a financial expert, nor do I claim to be one – this is all how I understand the law as a small business owner. Please talk to your accountant about Section 179 and see if it works correctly for your business. If Mavidea can help you prepare your business for success for 2013, please let us know.
Jamie
