Buying equipment for your business? Depreciation change may help

Depreciation is a term of art in tax law. It doesn’t refer directly to something losing value. It refers rather to tax deductions for businesses to reflect the cost of wear and tear on their equipment.

Since 2003, these deductions have become increasingly complex. Legislation enacted during the first administration of George W. Bush tried to give businesses an incentive to invest by allowing for accelerated depreciation. But the complexity and lack of permanence of the rules posed many difficulties for business owners.

Now, however, Congress has acted in an attempt to bring clarity to this important but underappreciated area of tax law. In this post, we will inform you about the recent change in the Section 179 deduction.

In essence, the change gets rid of the previous depreciation schedule for these Section 179 deductions. That schedule was pretty complex and required business owners to keep track of a multi-year schedule over the useful life of an asset. As a result, it tended to encourage at least some business owners to lease rather than buy.

The new rule is much simpler. It will generally allow small and mid-size businesses to deduct the entire cost many equipment purchases right away. For those purchases, constant consultation of a multi-year depreciation schedule will no longer be necessary.

The change in the depreciation rules is not revenue-neutral. It will cost about $77 billion over the next decade, according to estimates by a congressional committee. But there is no doubt that some business owners are excited about the change.