Break for small business

Hidden in the back of the big omnibus bill that passed just days before Congress broke for the holidays was an important new change in the tax laws. It gives a boost to small and midsized businesses, and might help stimulate the economy.

The change applies to something called the Section 179 deduction, and it establishes a permanent deduction for purchases of qualifying equipment.

I know – taxes and depreciation schedules put you into a coma. Before your eyes glaze over, follow what this means. Before, when a business bought or leased a piece of equipment, some of the costs were written off each year through depreciation. This offered businesses some incentive to invest in equipment, but it made their accounting and taxes more complex than necessary.

The change to Section 179 eliminates that depreciation schedule. Small companies can simply purchase as much as $500,000 in business-related equipment and write it off that year. It’s a much simpler approach to making and accounting for capital expenditures.

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This is a much-improved version of the Jobs and Growth Act of 2003, a temporary tax plan that was passed to spur the economy. It allowed for the accelerated depreciation of capital spending. It was an attempt to encourage businesses to make additional capital investments.

The headache-inducing depreciation schedule of writing down an equipment purchase over the course of its useful lifetime now goes away for most business purchases made by small and midsize companies. It is also indexed to inflation. Once a company spends more than $2 million on equipment, the tax advantages get phased out.

As someone who runs a small business, I can tell you this is very significant. Every time I need a laptop or software or office furniture or anything else with a useful lifespan of more than one year, it’s a nettlesome leasing chore. Now, I no longer need to contact a leasing company – I can just buy it, and write it down 100 percent in the year of the purchase.

The costs of this are relatively modest. According to Congress’ Joint Committee on Taxation, the estimated revenue loss is less than $8 billion a year – about $77 billion during the next 10 years.

This economic cycle has seen only a modest increase in capital expenditure from small and midsized companies. Somehow, Congress has passed a targeted tax cut that is modest in cost that could create a pop in corporate spending. Consider it your Christmas present from Washington. •

Barry L. Ritholtz is a Bloomberg View columnist.

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