Economic Recovery and Section 179: An Important Tool for Your Business

It is hard to understate how difficult this year has been for small businesses. According to a recent study, 31% of small and medium-sized firms are currently not operating due to a lack of demand and disruptions in cash flow. But the most current economic forecasts do give us some reason for hope. Following a drastic fall at the beginning of 2020, GDP growth across the world has steadily increased and is projected to continue in a positive direction. (Check out the OECD website for detailed economic analyses.)

Small businesses remain a vital part of our economy, and they will be an important part of this recovery as well. But what can businesses due to promote growth in such an adverse economic environment?
There are two things that small businesses consistently identify as hurdles to growth: the first is difficulty navigating tax burdens. Owners spend an average of six hours per week dealing with government regulations and tax compliance, and many feel they lack the knowledge to navigate regulations effectively. The second hurdle to growth reported by most owners is the lack of access to capital. One in three businesses who apply for financing say they receive less than what they request, and many business owners rely on some amount of personal financing to both start and maintain their business.

One potential solution to ease both these burdens is a tax write off called Section 179. This deduction allows you to write off the full purchase price of a vehicle in the year you buy it, rather than following a typical depreciation schedule. 179 is ideal for companies operating equipment between 6,000 and 14,000 lbs, a range that captures the weight of most vans, SUVs, and trucks used for commercial purposes. So long as the vehicle is put in service this year, and it’s used at least 50% of the time for business purposes, the entire purchase price of the truck can be written off this year.

Though the tax breaks from 179 are favorable for most companies, there are a few things to consider. First, if you are thinking about selling, note that accelerated depreciation will create artificially low net income and therefore decrease your company’s valuation. If you anticipate entertaining offers to sell in the next year, inconsistency in net income could scare off potential buyers. As with many tax and finance pitfalls, however, careful record keeping will win the day. Maintain a set of books that follow “GAAP” (Generally Accepted Accounting Principles) as well as a set for tax purposes, to explain the discrepancy in net income to potential buyers.
Even if you have no plans to sell, taking advantage of a write-off requires thorough documentation of when and how the equipment is used. It is strongly recommended you keep careful track of all transactions related to your equipment, including repairs, registration fees, and even gas. If this is not yet a standard procedure for you and your employees, make sure you implement those processes before you purchase the new equipment.

If this year has taught us anything, it’s that nothing ever goes as planned. As you finish out this year and plan for the next, it would be wise to take advantage of 179 while you can. Both economic and political change will continue to affect us in 2021, and regulations from this year are not guaranteed to carry over into the next. Consult your tax expert to determine if 179 can help your business recover and thrive.

Sources

The Atlantic. 2019. The state of small business in America: Inside the growth engine. The Atlantic. https://www.theatlantic.com/sponsored/goldman-sachs-10000-small-businesses/the-state-of-small-business-in-america-inside-the-growth-engine/1028/
Facebook. May 2020. State of small business report. Available at https://dataforgood.fb.com/wp-content/uploads/2020/05/SMBReport.pdf.
Ganos, Todd. 26 Feb 2020. Are your tax choices killing the value of your business? Forbes.com. Available at https://www.forbes.com/sites/toddganos/2020/02/26/are-your-tax-choices-killing-the-value-of-your-business/#14874a935ef1.
OECD. 6 June 2020. A collapse in GDP and an uncertain recovery. OECD.org. Available at http://www.oecd.org/coronavirus/en/data-insights/a-collapse-in-gdp-and-an-uncertain-recovery.
Section 179.org. 2020. Section 179 Deduction. Available at https://www.section179.org/section_179_deduction/.

No comments yet... Be the first to leave a reply!