NEW YORK —
"People were making decisions they normally wouldn't be making at the end of last year," says Brian Burt, an attorney with the law firm Snell & Wilmer in Phoenix. His clients include small businesses in the manufacturing, financial services and software industries.
"That uncertainty makes for bad decision making," Burt says. One of his clients, a consumer products manufacturer, bought new machines at the end of the year to increase its capacity. Another manufacturing client invested in new software.
The deduction, named after a section of the federal tax law, allows small businesses to deduct up front the costs of equipment such as vehicles, manufacturing machines, furniture and computers. The deduction is important and popular because it allows small businesses to get a tax savings on the entire cost of equipment in the year it was purchased. Without it, they would have to depreciate the costs over a period of years which varies according to the type of equipment. Companies that get a refund get a boost in their cash flow from their tax savings.
"The Section 179 proposal is pretty big because it affects everybody," says John Arensmeyer, the CEO of Small Business Majority, a group that lobbies on behalf of small businesses.
The deduction was created as part of the Economic Recovery Tax Act of 1981 — a law passed to help the country emerge from the 1980 recession. In 1982, the year it took effect, the deduction was $5,000. Congress increased it through the years until it reached $125,000 in 2007. It doubled to $250,000 in 2008-09 because of the Great Recession, and subsequently rose to $500,000.
How much a small business saves in taxes from the deduction depends on how much they spend on equipment, and on the company's or owner's tax rate. In many small companies, including sole proprietorships, partnerships and some corporations, owners pay business taxes on their individual returns.