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The PATH Act: Improved Tax Breaks for Small Businesses

businessman saving money improved tax breaks for small businesses

Investing in new equipment for your business can be challenging. Large, up-front costs can diminish your working capital making many entrepreneurs hesitant to take the leap. However, due to the improved tax breaks for small businesses, there has never been a better time to buy those high-ticket items.

The PATH (Protect Americans from Tax Hikes) Act which passed in December 2015 and rolled into the 2016 federal budget, provides significant tax breaks to businesses on their equipment purchases. Whether you’re thinking about moving your manufacturing in-house, furnishing a new office, or investing in better office technology, now is the time to get out your checkbook and take advantage of the benefits. But first:

Here is what entrepreneurs should know about the PATH Act.

The Tax Deduction Limit has Increased Substantially:

In tax year 2015, the Section 179 deduction limit increased to $500,000 on purchases up to $2 million. After the cap has been reached, the benefit begins to reduce on a dollar for dollar basis. Section 179 was designed to help small-to-medium sized businesses reduce the up-front cost of purchasing equipment within the calendar year, as opposed to depreciating the cost over time. It’s a great incentive for entrepreneurs who are just getting their business off the ground, are ramping-up, or are ready to move their operations in-house.

Eligible purchases under the PATH Act:

The PATH Act covers both new and pre-owned equipment that is used more than 50% of the time for business purposes. This includes machinery, property, computers, vehicles, office furniture, off-the-shelf software, and more. For a complete list of covered purchases, click here. You can also deduct leased equipment using Section 179.

2014 depreciation laws were extended:

If equipment purchases exceed the $500,000 dollar cap, business owners can take advantage of a 50% bonus depreciation for the 2015 tax year on top of the normal 20% depreciation rate. The bonus depreciation will decrease to 40% in 2018 and again to 30% in 2019, so it’s a good idea to take advantage now and recover more of the cost on qualified purchases.

Yikes….math

Let’s look at an example calculation:

PATH Act Calculation Tax Breaks for Small Businesses

These calculations assume that your business falls under the 35% tax bracket. With these deductions, the real cost of your equipment purchase in the 2015 tax year would be $526,000—a substantial savings. 

Use the Section 179 calculator to determine how much your business can actually save based on the projected cost of your own purchase. 

To buy or not to buy:

Obviously there are additional factors that should come into play as you determine whether or not now is the best time for your business to buy. Be thorough in your research and preparation before you decide to take the plunge. Use your cash-flow forecast to determine how the out-of-pocket expense will impact your business in the short-term (check out our webinar on building forecasts if you need help). Do you have enough cash in the bank to float operational costs until you see the benefits of your purchase? If not, what assets does you business have that you might be able to leverage for working capital?

Keep in mind that you also need to factor in long-term benefits. For example, if you’ve brought manufacturing in house using new equipment, how will that impact your margins over the course of the next year?

Answering a few of these questions will help you determine if your business is ready to make an expensive purchase. Be sure to consult your accountant as you work through the calculations. If you have decided to move forward and invest big in your business this year, read these tips on maximizing your deduction.

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