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Financial Planning > Tax Planning > Tax Loss Harvesting

Break for small business that might do some good

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(Bloomberg View) — Hidden in the back of the big omnibus bill that passed just days before Congress broke for the holidays was an important new change in the tax laws. It gives a boost to small and mid-sized businesses, and might help stimulate the economy. 

The change applies to something called the Section 179 deduction (see and this tax calculator for the specifics) and it establishes a permanent deduction for purchases of qualifying equipment. 

I know — taxes and depreciation schedules put you into a coma. Before your eyes glaze over, follow what this means. Before, when a business bought or leased a piece of equipment, some of the costs were written off each year through depreciation. This offered businesses some incentive to invest in equipment, but it made their accounting and taxes more complex than necessary. 

The change to Section 179 eliminates that depreciation schedule. Small companies can simply purchase as much as $500,000 in business-related equipment and write it off that year. It’s a much simpler approach to making and accounting for capital expenditures. 

This is a much-improved version of the Jobs and Growth Act of 2003, a temporary tax plan that was passed to spur the economy. It allowed for the accelerated depreciation of capital spending. It was an attempt to encourage businesses to make additional capital investments (see this discussion from 2004).

The Bush administration version was an improvement over the earlier rules, but it left a lot to be desired: First, it was temporary, making long-term planning a challenge. Second, it was complex, allowing more than 50 percent of the purchase cost to be written down in the first year (more precisely, it allowed the depreciation of half the purchase price, plus one half of the ordinary depreciation in year one; on average, this worked out to a writedown of between 57 percent and 67 percent). 

The new permanent rule replaces all of that. The headache- inducing depreciation schedule of writing down an equipment purchase over the course of its useful lifetime now goes away for most business purchases made by small and mid-size companies. It is also indexed to inflation. Once a company spends more than $2 million on equipment, the tax advantages get phased out. 

As someone who runs a small business, I can tell you this is very significant. Every time I need a laptop or software or office furniture or anything else with a useful lifespan of more than one year, it’s a nettlesome leasing chore. Now, I no longer need to contact a leasing company — I can just buy it, and write it down 100 percent in the year of the purchase. 

There are some obvious winners and losers here. I expect that this could cause a modest increase in capital spending among small and mid-sized businesses. Companies that make computers, software, farm and industrial machinery, and trucks and cars could see modest gains. Leasing companies are the losers here. 

The costs of this are relatively modest. According to Congress’s Joint Committee on Taxation, the estimated revenue loss is less than $8 billion a year — about $77 billion during the next 10 years. 

Other drawbacks? It potentially could prod companies to increase their capital spending at the expense of hiring. Of course, there is a relatively simple solution to this: Marry the tax break to a payroll tax holiday that encourages companies to hire more. 

This economic cycle has seen only a modest increase in capital expenditure from small and mid-sized companies. Somehow, Congress has passed a targeted tax cut that is modest in cost that could create a pop in corporate spending. Consider it your Christmas present from Washington.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

See also:

Time for a change

Prime time for private equity-backed insurance brokers

DOL fiduciary rule survives omnibus bill


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