Tucked inside the mammoth tax and spending bill passed by Congress this month is a much-anticipated provision that will lock in a large tax break for small-business capital investments that has been temporary until now.
The break is intended to make it more affordable for small companies to buy up to $500,000 a year worth of equipment like computers, machinery and vehicles.
Known as the Section 179 deduction, the tax provision allows qualifying capital items to be written off immediately on a business’s taxes, instead of being depreciated over a number of years. That has the effect of lowering a business’s taxable profits, sometimes significantly.
The deduction is essentially limited to small and midsize companies. It begins phasing out when a company spends more than $2 million a year on qualifying purchases, and is eliminated entirely for those that spend more than $2.5 million.
Jerry Kortesmaki, the owner of London Road Rental Center in Duluth, Minn., relies on the deduction to stock up on equipment for his machinery and party supplies rental business. This year, he is using it to help pay for some $200,000 in new goods, including chairs, a mini-excavator, four trailers, an insulation blower and a sewer camera.
“I’ve been able to grow my company very quickly because I’ve been able to reinvest whatever I made in buying more equipment to rent,” said Mr. Kortesmaki, who has 11 full-time workers at his 13-year-old company.
The deduction works like this: If a company has a $90,000 profit and decides to spend $50,000 of it on new computers, the company would normally write off the cost of the equipment gradually, deducting a portion of it each year over the span of the computers’ useful life. But Section 179 allows the business to deduct the entire $50,000 cost at once in the year the equipment is purchased, reducing the company’s taxable profit to $40,000. (The deduction cannot exceed a business’s total net income.)
Nearly all small businesses, even the very tiniest, should consider taking advantage of the deduction, said Tanya Ouellette, an accountant with Raiche & Company in Dover, N.H.
“It doesn’t have to be a huge piece of equipment,” she said. “I tell my clients, ‘If you bought a new Apple laptop, we’re going to take a 179 on that.’ ”
For equipment dealers like Sherry Wuebben, who sells farm machinery, the permanence is as big a deal as the tax break itself. For the last few years, she and her customers have watched nervously as the year’s final days slipped away, wondering when — and whether — Congress would renew the deal that many business owners rely on to finance their big-ticket purchases.
“We would get phone calls every day from customers about it, wondering if they should go ahead and buy,” said Ms. Wuebben, who is an owner of St. Joseph Equipment in La Crosse, Wis. “The uncertainty weighed very heavily on them.”
CreditMark Kegans for The New York Times
Section 179 was once a fairly limited tax break, with an annual cap of $25,000 or less. But in 2003, Congress temporarily raised the limit to $100,000, and in 2008, as the recession set in, it raised the cap again to $250,000. In 2010, hoping to stimulate more spending, Congress increased the limit to $500,000, allowing businesses to use the deduction toward expensive items like factory machinery and trucks.
But each increase was a temporary measure requiring annual reauthorization to prevent the cap from returning to $25,000 — and Congress developed a habit of waiting until the very last days of the year to make a decision. In 2012, it missed the calendar deadline completely and passed legislation on Jan 1, 2013, retroactively raising the deduction limit for equipment business owners had purchased the previous year.
“The uncertainty drives my clients up a tree,” said Paul Neiffer, an accountant with CliftonLarsonAllen in Yakima, Wash., who specializes in the agricultural industry. “Not knowing each year if it will be extended prevents a lot of our farmers from pulling the trigger on buying equipment.”
Mr. Kortesmaki said he was confident enough that Congress would once again lift Section 179’s cap to go ahead this year with his planned capital purchases, even before the legislation was passed. But other business owners held off — and this year, the deal came too late for some, Ms. Wuebben thinks.
“You can’t plan to spend that kind of money with just two weeks left in the year,” she said. “We might see some activity this year, but the real benefit for us will come next year, when customers can plan ahead for it.”
Some companies do try to jam in qualifying purchases before the calendar year ends. Last year, Congress raised the Section 179 limit for the year on Dec. 16. The next day, the prices farm machinery sold for at auctions increased compared with just a few days earlier, according to Greg Peterson, the owner of Machinery Pete, a site that tracks equipment auction prices.
“The response is nearly Pavlovian at this point,” he said. “The farm audience had grown so used to this annual silly dance of wait-and-see on our friends in Washington.”
Making Section 179’s higher limit permanent will cost taxpayers $77 billion in foregone revenue over the next 10 years, according to a government estimate. The tax break’s aim is to stimulate spending — but does it work?
An analysis by the Congressional Research Service found that expensing allowances like Section 179 appear to “have a minor effect at best” on how much businesses spend on capital goods. Expectations for future sales growth, not tax considerations, motivates most of the investment in the kinds of assets eligible for expensing.
The main advantage of expensing allowances, the report suggests, comes from simplifying the tax accounting business owners face on their capital purchases.
Still, owners like Mr. Kortesmaki see the tax break as a crucial one for helping their small business grow a bit bigger.
“I’d rather invest that money in my business than pay taxes on it,” he said. “Having this become permanent makes my business planning for the next few years a whole lot easier.”