Prior to Section 179, a company was allowed to deduct a percentage of the items useful life to reduce taxable income. The percentage deducted was dependent upon the items useful life as determined by accounting standards.
So, an item with a 5 year useful life would provide for a 20% deduction each year over a five year period. A $100,000 item would have a $20,000 deduction in each year over the next five years. A 35% tax bracket, would produce a $7,000 ($20,000 x .35) tax savings each year.
However, with Section 179, a company is allowed to deduct the entire purchase price, up to $500,000, which essentially increases a company's tax savings to five times greater, for items with a five year useful life. Certain conditions do apply. For example, the equipment must be put into service during the current tax year, must be used for business purposes more than fifty percent of the time, and it applies to business that acquire less than $2,000,000 of equipment during the calendar year. This is the qualifier that was put into place so that Section 179 would benefit "small" businesses.
Section 179 was first put into effect as a mechanism to induce small businesses to procure capital equipment and help the U.S. economy.
Because a properly structured finance or lease agreement implies ownership, a company can obtain these same tax benefits without having to outlay cash for the equipment. A company can make monthly finance payments over time and still take the full deduction.
