Update, December 16: Politico and other news sources are reporting that Congress has agreed to make permanent several tax extenders, including the one called Section 179 that is outlined in this article.
Each year at this time, Congress waits until the last minute possible to renew a small business-friendly tax provision. For many small businesses, it’s too late. It’s known as “Section 179 expensing” and allows a company to immediately expense (rather than depreciate over time) money invested in certain capital items like computers, manufacturing equipment and commercial vehicles. In recent years, Congress has raised the amount that can be expensed from $25,000 to $500,000, but only through the remaining few days of the calendar year. The $500,000 cap then “sunsets” and drops back down to $25,000 on January 1 — a couple of weeks after the provision is passed. Unfortunately, that means that a business is playing Russian roulette if it makes a capital investment earlier in the year, trusting Congress to raise the deduction back to $500,000 at the 11th hour.
Why Section 179 Expensing Makes Sense
The provision provides a clear incentive to businesses to make capital improvements and purchase equipment, rather than subject the capital expense across a long depreciation schedule — a disincentive for investment.
What is Broken?
According to NFIB’s Amanda Austin, the law requires that equipment be purchased and placed in to service before the end of the year in order to qualify for small business expensing. “Forklifts and combines are not eligible for Amazon Prime and two day delivery. Some equipment can take weeks or even months to order, and as a result many small businesses forfeited the benefited,” Austin wrote in a letter to lawmakers.
In effect, because the tax provision is not permanent, Congress makes businesses play Russian roulette with capital spending throughout the year. “And because few companies have cash set aside if Congress doesn’t come through, the potential incentive is only utilized by larger companies. Last year, for example, the bill wasn’t signed until December 19, 2014, leaving small business owners with only 12 days to decide whether to make big financial investments,” says Austin.