Downsides to the Section 179 Deduction for Small Businesses

At the end of 2015, the Section 179 Deduction was made a permanent part of the US tax code. In the Kabbage post, What Business Owners Should Know About Congress’ New Depreciation Deduction, we laid out how small businesses can take advantage of this update — the biggest benefit is that businesses can write off up to $500,000 of qualified expenses in the year they’re accrued.

Groups have hailed this as a boon to small businesses, since it will provide them with more cash on hand to invest in capital expenses or grow their companies in other ways. The National Federation of Independent Business has said that it would add 200,000 jobs and $19 billion to GDP over the next decade. It was believed that the Section 179 Deduction would directly contribute to economic growth.

However, small businesses that are actually taking the deduction have a less rosy view. One small business owner says more working capital will lead to a better tax situation — however, it does not necessarily lead to more jobs. The code will also cost taxpayers an estimated $77 billion over the next 10 years.

There is also inconclusive evidence around whether it can stimulate the economy and job growth. Anecdotally, we see that it doesn’t necessarily result in more jobs and that holds on a macro level as well. Research does show, however, that the deduction has a stronger effect when the economy slows. During a recession, small businesses spent 17 percent more on equipment annually after applying the deduction. But historical data accounts for years when the Section 179 Deduction was used as a stimulus, rather than a permanent part of the tax code. The fact that this credit would expire every few years may have been extra incentive for companies to take advantage of it.

But for firms that are capital-intensive, the Section 179 Deduction will prove invaluable no matter the time of year. It was designed specifically to help businesses because:

  • It’s valid on most types of equipment, including general business and off-the-shelf software. You can view a full list of qualifying Section 179 equipment here.
  • It can help your bottom line, since the deduction lowers the amount you pay for equipment whether you buy or lease it.
  • It’s simple to use and only requires the appropriate IRS form.

If you need a Section 179 calculator to estimate your tax savings, check out this one from FitSmallBusiness.

Do you think you’ll take advantage of the Section 179 Deduction? Let us know on twitter@KabbageInc.

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