A long-term asset — or capital asset — is something that has a useful life of more than a year, such as a computer, equipment, furniture, or phone system (inventory is not included).  To deduct the expense, you can either use Section 179 or depreciation.

Section 179 comes from the IRS Code.  And while it sounds foreboding, it can be extremely beneficial to your business.  You can deduct up to $250,000 of long-term assets in a single year.  This is usually more favorable than depreciation, which expenses an asset from anywhere from three to thirty-nine years.

To qualify for Section 179, an asset must be:

Tangible Personal Property:  While this means that the asset must be something you can touch, this is not always the case for the IRS (for example, software is considered tangible personal property).  Assets that do not count include land and structures attached to land (buildings, fences, pools and parking lots), intellectual property (patents, copyrights and trademarks), and air conditioning/heating units.

But, the IRS has concerns about certain types of property, which may be really for personal purposes.  This is known as listed property and includes:

• Cars, boats, motorcycles and airplanes
• Computers
• Cell phones
• Other entertainment products (such as cameras)

To deal with listed property, the IRS wants you to maintain some type of log or diary for the use.  The exception is computers.

Used Primarily for Business:  The asset must be used 51% or more of the time for business purposes.  However, you must exclude the deduction for the percentage of time that was for personal use.  Finally, the business must have already started in order to take the Section 179 deduction.
The amount of the deduction is the cost of the asset plus any expenses for sales tax, installation and shipping.  It does not matter if you use debt to finance the purchase (however, the asset cannot be leased).

Of course, there are some limits.  For example, for each dollar above $800,000 in expenses, there is a corresponding reduction in the $250,000 deduction allowance.  The $800,000 threshold is scheduled to decline by 2011 to $200,000.

Another limit is that the Section 179 deduction may not exceed a company’s net taxable income (any excess can be carried forward to future tax years).  This amount does not include deductions for half of the self-employment tax, the Section 179 deductions and operating losses that have been carried back or forward.  At the same time, you can include your own salary as well as your spouse’s.

In fact, if you have a net loss, you cannot take any Section 179 losses.  However, it is possible to carry forward these losses to future tax years.  To do this, you will need to file Form 4562. 

Once you take a Section 179 deduction, you must continue to use the asset for its useful life.  If not, you may have to report a gain (known as recapture).