IRS Deduction Can Help Small Businesses

With the end of the year approaching faster than a speeding audit, several CPAs are encouraging small business owners to take advantage of an annual IRS deduction for capital expenditures.

Section 179 of the IRS tax code allows for annual deductions of up to $125,000 on business related purchases.

This deduction applies to tangible property, including items necessary for day-to-day operations at many small businesses, said CPA Eric Schermerhorn, a partner with Prier Burch & Schermerhorn CPAs in Fayetteville.

To qualify, an item such as a vehicle, computer, phone system, copier or similar fixed asset must be purchased and put to business use within the year the deduction is taken.

If, however, a business owner spends more than $500,000 on equipment in a year, the amount deductible decreases on a dollar-for-dollar basis, Schermerhorn said.

For example, if a business owner spent $525,000 on equipment, the amount deductible under 179 would be $100,000. If the owner spent more than $625,000, there would be no Section 179 deduction allowed whatsoever.

Another rule regarding the deduction is that it cannot exceed the amount of taxable income of the person claiming it. So if a business owner had income of $100,000 in a year and spent $125,000 on equipment, he or she would only be able to deduct $100,000.

“We do use 179, if [clients] need it,” said Clayton Dowell, CPA with Ken Lance & Co. in Fayetteville. “But I don’t believe in buying something just for the deduction.”

Tim Johnson, CPA and manager with BKD LLP in Little Rock, agreed with this line of reasoning.

Johnson said if a business owner is considering a big ticket item anyway, it might be prudent to make the purchase before the end of the year, especially if he or she has had a profitable year and could benefit from a sizeable deduction.

Retailers Usually See Year-End Spike

Purchasing trends definitely change for several reasons as the year draws to a close.

While some are motivated to buy for tax-related purposes, others might base their decisions on year-end deals, said Shawn Griffin, general manager for the Johnson location of Bentonville-based Telecomp Inc.

Griffin said he usually sees an increase in sales toward the end of the year, and cited a couple of reasons.

First, many retailers are trying to move older product to make way for upgrades and newer models that tend to be introduced at the start of the year.

Subsequently, many retailers often promote discounts to help clear out stock.

Secondly, consumers are psychologically more inclined to spend money near the end of the year because they are in a holiday season mindset, Griffin said.

The fourth quarter is nearly always the busiest time of the year, said Tim Stanley, owner of Xerox dealer Total Document Solutions Inc. in Fayetteville.

Stanley estimates his company does 35 percent or more of its business in the final quarter. This has been a difficult year for TDS, though. This year, Stanley started noticing many long-time customers seemed apprehensive about renewing contracts even though new plans would save many of them money.

“What normally would have been a slam-dunk, people are more apprehensive about now,” Stanley said.

Copiers can cost a lot, so making a long-term commitment seems to have some customers tied up in knots, he said.

“This year I’ve had to scratch and claw and scrape with every order,” he said.