The Section 179 Deduction: Congressional Delays Continue

Since its enactment in 1958, Section 179 of the Internal Revenue Code has provided small businesses with an important first year tax deduction for both new and used equipment acquisitions. By claiming an upfront tax deduction for the cost of equipment, a business is able to reduce its overall equipment carrying cost through an acceleration of its tax benefit.

For much of its history, Section 179 provided relatively small deduction limits of less than $25,000 annually. However, beginning in 2003, Congress began increasing the Section 179 expense limit in response to continuing recessionary fears. In 2003, the Section 179 limit was increased from $25,000 to $100,000. In 2008, the limit was again increased to $250,000. Since 2010, the Section 179 limit has been established at $500,000 with the limit phased out when capital expenditures for a year exceed $2 million. Such increases in the deduction limit have been made as part of the annual ‘tax extenders’ legislation whereby Congress regularly extends 55 different tax breaks for both business and individual taxpayers.

Congress has yet to pass tax extender legislation for 2014. As a result, the Section 179 deduction limit reverted to only $25,000 beginning January 1, 2014. This represents a very significant curtailment in tax benefits for small businesses. Congressional inaction has likewise resulted in a high degree of uncertainty for businesses making equipment purchase decisions with respect to the resulting tax benefits. While in June 2014, the House passed HR 4457, America’s Small Business Tax Relief Act of 2014, which permanently extends the Section 179 deduction limit at $500,000 annually, the Senate has yet to pass any extender legislation in spite of bipartisan calls for such action. The current administration has rejected the permanent nature of the House bill extension demanding that revenue offsets must be in place to cover the approximate 10-year cost of $70 billion.

So, where does that leave us? Most Congressional commentators remain very bullish that tax extender legislation for 2014 will ultimately be passed, albeit not until late in the year (e.g., immediately before November elections). Such a late year extension will necessitate retroactive effect to January 1, 2014. While lawmakers will surely pat themselves on the back for bestowing the continuation of decades-old tax benefits, they will ignore the practical effect of the uncertainty they have created for the American taxpayer through their delay.

While the reinstatement of the Section 179 deduction limit to $500,000 is one consideration in a small business owner’s equipment acquisition decision, it is certainly not the most important. The impact of greater capacity and/or capabilities on sales growth and operating efficiencies remains the principal consideration for most business owners when making a new investment. Through the first half of 2014, we have seen greater optimism of businesses reflected in their buying patterns and continued increases in equipment acquisitions, in spite of the delays surrounding the higher Section 179 deduction limit.


Last modified: July 14, 2014