Overcoming Business Expense Limits

A major tax break for small businesses is the ability to write off the cost of machinery and equipment used in the business in the year of purchase rather than writing off the cost over a period of years (usually five or seven) via depreciation deductions.  This is accomplished by using the Section 179 expensing deduction that allows capital equipment to be written off.  However, the deduction is limited to your taxable income from any active trade or business for the year in which the equipment is purchased and placed in service.  Many taxpayers overlook the fact that their salary (and their spouse’s if they are married and filing jointly) as an employee counts as taxable income from trades or businesses, thus qualifying as income for expensing purposes.

Therefore, you can write off the equipment’s cost (up to $250,000 for the 2008 tax year) even if there is no business income yet, as long as your salary in that year at least equals what was spent on the equipment.  The resulting net loss from your business activity can then offset your other income.

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