Why Do So Many Small Business Owners Drive Hummers?

Surely you've noticed at least one or two company-branded Hummers driving around in your area. Do you wonder how these young, small businesses can afford them? It's not need and it's not vanity; it's because of a relatively unknown tax code that practically gave these small business owners an SUV, with the ability to write off the whole purchase.

A total write-off?

Tax Code Section 179 is a tax deduction that allows small business to expense, in the current year, company assets that generally get depreciated over several years. The expensing allowance under Section 179 encourages capital spending by allowing you to deduct more depreciation than usual. The best part is that for the year 2007, the deduction limit is the highest it has ever been, at a whopping $125,000 (up $17,000 from 2006), which is about the price of a brand new heavy-duty SUV.

So what is the connection between the tax deduction and a new vehicle?

The tax code has two notable areas: the ability to write off equipment used in your small business, as well as write-offs for vehicles over 6,000 lbs. In 2004, the deduction stood at $102,000, but became severely limited in October of that year. Critics felt that the deduction unfairly subsidized buyers of fuel-inefficient SUVs, and so a reduction to $25,000 was imposed by Congress.

It's still a "Hummer of a Tax Break"

If you want a heavy SUV, now is the time to buy. The tax law will let you claim the $25,000 Section 179 write-off as well as the normal first-year depreciation write-off. Let's say you spend $60,000 for a new vehicle, used for business. You can claim the following deductions on your 2007 tax return:

$25,000 Section 179 write-off
$7,000 regular depreciation (20% of $60,000 minus $25,000).

That brings your first year deductions to $32,000, or about half the cost of the vehicle. It's a much better deal than first-year depreciation on a luxury automobile, which is limited to approximately $3,000.

Don't need a heavy-duty SUV? Buy new equipment instead.

The tax code isn't just for machinery and large equipment. Section 179 also allows small businesses to deduct a large array of office necessities such as furniture, computers, even off-the-shelf software. You can buy iPhones for you and everyone who works for you. You can even have the latest and greatest computer hardware and software! And be able to write off all those purchases! Check out this cool calculator that will help you determine your potential savings on equipment purchased for 2007.

The Section 179 Allowance Calculator

Cost of Equipment:
Section 179 Deduction:
Regular First Year Depreciation Deduction:
Total First Year Deduction:
Cash Savings on your Equipment Purchase: (assuming a 35% tax bracket)
Lowered Cost of Equipment after Tax Savings:
The calculator presents a potential tax scenario based on typical assumptions that may not apply to your business. This page and calculator are not tax advice. The indicated tax treatment applies only to transactions deemed to reflect a purchase of the equipment or a capitalized lease purchase transaction. Please consult your tax advisor to determine the tax ramifications of acquiring equipment or software for your business.

More About Section 179 Deductions

Section 179 is primarily for small businesses that spend less than $500,000 a year on qualifying equipment or vehicles. If you've already spent that much, you are still eligible for a tax break. For each dollar over $500,000, the deduction is reduced by a dollar. So if you have spent $550,000 this year, your deduction would be reduced by $50,000. That still leaves up to $75,000 for you to claim in 2007.

What exactly is a qualifying piece of property?

Most business equipment qualifies for the Section 179 expensing allowance, including:

Tangible personal property (machines, equipment, furniture, etc)
Business vehicles with gross weight of 6,000 pounds or greater
Certain other tangible property used for specific purposes
Single-purpose agricultural or horticultural structures
Certain storage facilities

Generally, most movable assets qualify; however, permanent structures do not qualify for Section 179. Even used equipment and vehicles qualify if they are new to you. In other words, if you acquire the equipment from a source other than yourself or an entity controlled by you, it should qualify. Publication 946 provides specific qualifying information.

Don't have the cash to spend? Borrow the money--it's worth it!

Section 179 is a small business incentive for capital spending. That means the tax code is there to help encourage spending which helps accelerate the economy. Tangible Goods financed by Equipment Loans or by most types of Equipment Leases (Non-Tax or Capital Leases) qualify for this deduction. Examples of Non-Tax (Capital) Leases include a $1 Purchase Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase upon Termination (PUT) Lease.

What if you spent too much?

Don't worry, depending on the equipment and specific scenario of the business, any excess equipment cost above the amount expensed under Section 179 can be depreciated using standard methods.

Things to note...

The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. To the extent that this site contains tax advice, such advice is not intended to be used and may not be used, for the purpose of avoiding federal, state, and/or local taxes.

Don't wait, act quickly!

Use of Section 179, which is made on Form 4562, is for the tax year the property was placed in service. Under Section 179, equipment purchases, up to the amount approved for a given year, can be deducted from taxable income - if installed by December 31st. Don't let this tax advantage get away from you!

Want to know more?

To get answers to your questions or to learn more, contact your tax advisor or visit www.irs.gov and reference Form 4562.