Buy Now, Save on Taxes

By Michelle Megna | Posted November 28, 2005

This year give yourself an early holiday present: take advantage of a federal tax incentive that lets small businesses write off up to $105,000 for new computers and software. The only catch is that to do so, purchases must be made by January.

The American Jobs Creation Act, a mammoth tax break package signed into law in October of 2004, was originally created to close an export tax loophole for U.S. businesses that the World Trade Organization deemed illegal. However, by the time the legislation was passed, it included 270 provisions including special incentives for subsistence whalers in Alaska, fishing tackle box makers, bow and arrow importers and NASCAR track owners.

But you don't have to be an Inuit Indian, avid archer or pit crew aficionado to benefit from the super-sized legislation. Under pre-Act law, a provision called Section 179 allowed small business owners to deduct costs of qualifying equipment—some furniture, computers and software—in lieu of depreciation. The limit was set at $25,000. In 2003, it was raised to $100,000, with the caveat that it would go back to the original amount in 2005. Enter the Jobs Creation Act in 2004, which extended Section 179 for another two years, through 2007. (Adjusted with accounting formulas, the $100,000 is $105,000 for this tax year.)

For the small business owner, what this means is that if you want to gain the benefits of the enhanced Section 179 for this tax year, you must buy new computers, network hardware or software before January. The advantage is that you can write off items in one year that otherwise would have to be deducted over a five-year period, says Ken Tratner, a C.P.A. and partner in the Los Angeles-based firm of Meloni Hribal Tratner, L.L.P.

"Unless some other legislation is passed, after 2007 the expense amount will go back to $25,000," says Tratner, whose firm is taking advantage of the incentive to purchase HP equipment.

Still, he advises small business owners to study how the measure will affect their financial planning. "Section 179 should be one tool in a firm's overall tax plan," says Tratner, "that when used correctly has significant benefits, say if a business wants to accelerate deductions. But, if you're not paying a lot in taxes, to capriciously expense something doesn't make sense. You'd want to spread it over a period of time. And software can be tricky. Section 179 applies to software, but it still begs the question, is that software licensed or purchased? If licensed, meaning you're really leasing it but don't own it, it's already an item you can expense, so you don't have to use up your quota on that."

If you do want to maximize your write-offs this year by taking advantage of Section 179, replacing as much of your computer fleet as you can will save you more money in the long run, says Doug Hafford, vice president of consulting services and co-founder of technology provider Afinety.

Traditionally, many small businesses replace computers in increments, over a three-year period to spread out the cost, but Hafford says the maintenance costs associated with a staggered cycle can be up to 45 percent more than the all-at-once approach.

When a company upgrades a few computers at a time over a period of years, it often ends up with operating systems and applications that conflict with each other, boosting costs in IT services and software solutions. For instance, when a company wants to install a new application, IT staff winds up doing it individually across all the different platforms and versions instead of completing a single system-wide install, which is much easier to do with one operating system.

Hafford, who is an HP partner and has already helped a handful of businesses use the Act to upgrade to HP networks, says that Section 179 facilitates an enterprise-wide replacement strategy. A typical network for 20 people purchased for $50,000 costs $250 to $275 per person per month, he says, but when replacing it with a new one, that monthly cost goes down to $115 to $135 per month

"We ran the numbers on what it costs a company with a 20-seat network to buy a new network, finance it and take the tax break. Because the tax break is large enough, instead of writing a check to the I.R.S., you have a new network and use the tax savings to pay for it that first year," says Hafford. "So basically, you get it for free that first year."

Furthermore, he says the price of computers hasn't risen with inflation or the spike in gasoline that increases transportation costs, so now is a good time to upgrade inventory. "Add that to the fact that interest rates are going to go up with the giant tax break," says Hafford, "and the price for what you get is spectacular." Happy Holidays!

When Michelle Megna began covering technology for computer magazines, the CD-ROM and AOL didn't yet exist. Since then, she's been on the byte beat for FamilyPC, Time Inc. and the New York Daily News. She's still waiting to see a pair of 3-D goggles that actually work.

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