Section 179 of the US tax code allows business owners, like dentists, to write off a capital purchase as a single year expense. The other method is to depreciate the purchase over several years by writing off a portion of the expense each year as you actually use it. As a rule tax professionals urge us to always take the write off and reduce taxes this year. We will worry about next year when it gets here.
I am not even remotely a tax professional. Do not take this as professional advice blah blah blah. Here is my layman’s understanding of how this works and what the consequences may be. In order to keep this understandable the numbers are very simple and a lot of variables are ignored. Never the less I think it gives a pretty good description.
Let’s say you have gross revenue of $400,000 with expenses of $300,000 which leaves a profit of $100,000 on which you would pay taxes, federal, state and withholding of say $35,000. You buy a $100,000 techwidget with a loan, so you have no out of pocket expense. However you can expense all $100,000 of the techwidget cost right now leaving you a profit of $0 and of course taxes of 0 and $100,000 in your pocket. Good so far.
Next year you have the same general income and expense leaving a profit of $100,00 but you pay of the techwidget loan so your actual cash on hand is 0. But you already expensed the $100,000 the previous year so you can’t write if off again which leaves a profit and taxes due of $35,000. But you don’t have the cash on hand to pay it. Not so good.
Using the 179 provision can be a great tax benefit. There are many reasons to buy now, get the break and pay later. However remember 179 does not always eliminate the taxes it might just delay them, so plan accordingly.