Bills in Congress would extend tax deductions widely used by small businesses making equipment or property purchases. One, known as the Section 179 deduction, has shrunk to a maximum $25,000 this year from $500,000 in 2013. Another, called bonus depreciation, expired at the end of last year.
The deductions are a big deal for small companies, saving them thousands or even millions of dollars on capital investments. But because Congress decides every year how big the deductions will be, owners can’t plan their equipment budgets until lawmakers vote. And in recent years, worried about the ballooning federal deficit, Congress has put off those votes, sometimes until late in the year.
The annual uncertainty hurts small businesses looking for a break when their combined federal and state tax rates run as high as 40 percent, says Doug Bekker, a certified public accountant with the firm BDO in Grand Rapids, Mich. They don’t know if they should make the purchase in the current year or defer it. And as the economy gets stronger and businesses are more profitable, they’re concerned about tax bills.
“If you talk to the typical small business out there, there’s a very high level of frustration,” Bekker says.
The Section 179 deduction, named for part of the U.S. tax code, allows small businesses to deduct up-front the cost of equipment such as vehicles, computers, furniture and manufacturing machines, rather than depreciate them over a period of years. The deduction fell to $25,000 for 2014 because Congress hasn’t approved a higher amount.
Many small businesses rely on the deduction. In a survey of more than 1,100 owners by the advocacy group National Small Business Association, 34 percent said they take advantage of it.
Before the recession, the deduction was fairly predictable, rising to keep pace with inflation. In 2007, Congress voted to nearly double it to $250,000 to stimulate the economy. It was $500,000 the next three years, but the final vote on a 2012 deduction didn’t come until the beginning of 2013 — too late for anyone who had decided against a purchase in 2012 believing there’d be no tax break.
Bonus depreciation is another break small businesses want back. It allows companies of all sizes to take an immediate deduction for 50 percent of the purchase price of equipment or real estate, with the remainder depreciated over a number of years.
It may look like Congress is anti-small business when it makes companies wait, but lawmakers are putting a higher priority on the federal budget and the overall tax code, says David Primo, a professor of political science and business at the University of Rochester. They’re avoiding the political fallout that will come their way if they create a large deduction and then reduce it when the government needs money.
“They might as well keep re-upping it year after year rather than risk revoking it,” Primo says.
There may be good news for owners who have been frustrated by a lack of clarity. House Ways and Means Committee Chairman Dave Camp (R-Mich.) has proposed setting a permanent amount for the Section 179 deduction as part of a bill that would revive bonus depreciation and other business and individual tax breaks.
And last week, the Senate Finance Committee approved a bill that would extend deductions into 2015. The bill goes next to the Senate floor; if it passes, it will have to be reconciled with any version that passes the House.
In the meantime, small business owners are adjusting their plans — and in some cases spending less.
Bill French has stopped buying equipment such as bulldozers until he knows how big his tax deductions will be. French, owner of W.L. French Excavating Corp. in North Billerica, Mass., spent $1.2 million already this year, not realizing how low the deduction had fallen. His other planned purchases are on hold. Last year, French spent about $2 million on equipment and estimates he saved more than $1 million in taxes because of the deductions.
“I’m just going to rebuild what I have,” French says. “It doesn’t make sense to buy new equipment.”