When to Take Depreciation Instead of the Section 179 Deduction

The Section 179 deduction is often the best thing for the small business owner since sliced bread. But there are situations when it may not be the best thing for your business. This article will introduce you to one of those situations so you can make the right decision and minimize your taxes to the extent allowed by law.

If your business has a loss, you are actually forced to not take the Section 179 deduction. You can only take the Section 179 to the extent of your business profit prior to consideration of any Section 179 deduction. So if you have a loss, the Section 179 deduction is automatically disallowed.

So what happens if you have a loss? You have two choices: 1) Take depreciation expense over the useful life of the asset; or 2) Carry over the full cost of the item to the next year. If you have enough profit in a future year to take the Section 179 deduction, you can do so then.

As you consider which option is best for you, keep these ideas in mind:

1. If you use option #1 above, that means you will get no deduction at all related to the that equipment in the year of purchase. And that may be fine, since you've already got a loss and will have no income tax or self-employment tax (if you are a Sole Proprietor) to pay.

2. On the other hand, you may have income from other sources that gets reported on your personal income tax return. For example, you may be a Sole Proprietor and have a spouse who is an employee. And you may be looking for as large a loss as possible on your Schedule C to offset your spouse's income. In that case, you may want to take the depreciation deduction in the year of purchase, because you can take the full amount of depreciation expense regardless of your business loss amount.