Small Business Benefit of Section 179

The recently enacted Consolidated Appropriations Act has increased the section 179 deductions to $500,000 for 2015 and future years.  This is the most talked about provision of this legistlation, but what is the real tax benefit?  There are two benefits to using the section 179 deduction:  Eliminating inflation’s effect on your deduction, and the decrease of tax based on your bracket in the current year versus coming years.

Based on information at Statista, inflation for 2015 will end up 0.1%.  This is the lowest inflation rate since 2009, when purchasing power actually deflated.  The average inflation for the past three years has been 1.72%.  Based on that rate of inflation for the next five years, what is the benefit of taking a deduction for a $100,000 purchase today?  $2,237.87.  Yeah, not much. But it is better than not taking it, so there is that.

Most small business are taxed at the individual level (as opposed to the corporate level) so we will use that for this analysis.  Most indivudual tax brackets jump up about 3%.  The exception is the 15% bracket.  The next bracket up from there is the 25% bracket.  This is the bracket a significant amount of Americans deal with.  The top of the 15% brackets for 2016 will be about $75,000 for married individuals.  So, if you are having a banner year, and find youself in the 25% bracket, when you are commonly in the 15% bracket, you could save yourself 10% on any assets you purchase before the year end.  Pretty nice deal, but the key is having a banner year.  You need to have been in a bracket you haven’t been in, and more importantly won’t be in.  If you are always in the 25% bracket, then this will only speed up your deduction, as there would be no tax benefit.

I love helping clients make decision regarding the use of section 179.  It means they are doing well financially, and are going to pass that along to other businesess in the economy by making a large purchase.  Despite this, I would never reconmend making a purchase just for the sake of section 179.  If you are in need something, and you have the business to support it financially, then section 179 can be a great planning tool.