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The Depreciation Deduction, What SMB Should Know

section-179-deductionAn important new change to U.S. tax law quietly passed before the end of the year. I know, it sounds dull, but it’s actually quite exciting; the change is intended to help small and mid-sized businesses and might even work to stimulate the economy.

The boost for SMB owners comes from an adjustment to Section 179 of the US tax code dealing with deduction. The new rule establishes a permanent deduction for purchases of qualifying equipment.

Before, when a business bought or leased a piece of equipment, some of the costs of the equipment could be written off each year through depreciation. In other words, business owners were required to calculate the costs of depreciation through the term of an asset’s useful life – which could be up to 39 years! While the promise of writing off necessary equipment created some incentive for companies to invest in equipment, the rules only made their accounting and taxes more complex.

Now, small businesses can simply purchase as much as $500,000 in business-related equipment and write it off, in it’s entirety, that year. It’s also indexed to inflation. Once a company spends more than $2 million on equipment, the tax advantages get phased out. This is a much simpler approach to making and accounting for capital expenditures, and has the potential to support a small awakening in the economy.

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