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SECTION 179 - Buy Now, Deduct Now

Most of us are now beginning the last three months of our tax year.  If you are in the market for new business assets, the timing of your purchases could make a big difference in your tax picture next April.

The tax law doesn't treat purchases of fixed assets like other operating expenses.  You can deduct your employees' salaries when you pay for them, but not the desks they sit in.  The cost of fixed assets must be capitalized and depreciated over several years - seven years for a desk, for example.

20071011 As in so many parts of the tax law, there is an exception to this capitalized cost rule: Section 179 of the tax code.  If you qualify, you can elect to currently expense up to $125,000 in fixed asset costs in 2007 that you would otherwise have to depreciate. 

Section 179 is a great deal, so of course there's a catch.  Actually, several of them.  Some of the bigger ones:

- It doesn't work for real estate - land or buildings, or lodging assets

- It doesn't work for intangibles like patents or goodwill (but it does work for software!).

- If you buy more than $500,000 in qualifying assets during the year, you begin to lose the deduction, and it goes away entirely when your purchases hit $650,000 for the year.

- The Section 179 deduction passes through to the owners of pass-through entities - partnerships and S corporations.  If the owners don't qualify to use Section 179 - say, because they have no income or are a big company with lots of asset purchases - Section 179 is a bad deal for them; they don't get either a current deduction or depreciation.

- If you buy a business car, you can't do better under Section 179 than you can under the regular car depreciation rules.

Even with these limitations, you might still have a lot of room to use Section 179.  If you are planning some fixed asset purchases, moving them up to December might make a big difference next April.  But check with your tax advisor first -- the rules can be tricky, and we don't cover them all here.

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