WASHINGTON -- Federal tax law allows businesses of all sizes to take a full write-off, or what is called 100 percent bonus depreciation, of almost any capital equipment, including rolling stock, placed in service during 2011.

But this provision expires at the end of December, and Congress may not extend it.

As it stands now, the law will allow smaller businesses to take only 50 percent bonus depreciation on new equipment next year, and there are certain limits on that.

The key section of the Internal Revenue Service code dealing with deductions and bonus depreciation is section 179. Many people think a section-179 deduction is an arcane or complicated tax provision; experts say it isn't.

Essentially, section 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.

That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income. It's an incentive created by Congress to encourage businesses to buy equipment and invest in themselves.

Today, section 179 is one of the few incentives contained in any of the recent economic stimulus legislation that actually helps small business.

Although large businesses also benefit from section 179, or bonus depreciation, the original target of this legislation was to provide tax relief for small business.

Essentially, section 179 works like this:

When a business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if a company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant as an example).

Now, while it's true that this is better than no write off at all, most business owners would naturally prefer to write off the entire equipment purchase price for the year they buy it.

In fact, if a business could write off the entire amount, it might add more equipment this year instead of waiting. That's the thinking behind section 179 -- to motivate the American business to move in a positive direction.

For most small businesses, adding equipment, software and vehicle purchases totaling less than $500,000 in 2011, the entire cost can be written-off on the 2011 tax return.

For large businesses adding more than $500,000, the write-offs are just as substantial. The accompanying graphic provides an example of the savings available after the Tax Relief Act of 2010 passed a year ago.

Limits of section 179

Section 179 does come with limits. There are caps to the total amount written off ($500,000 in 2011). The deduction begins to phase out dollar-for-dollar after $2 million is spent by a given business, so this makes it a true small- and medium-sized business deduction.

After passage of the Tax Relief Act of 2010, large businesses that exceed the $2 million in capital expenditure can take bonus depreciation of 100 percent on the amount that exceeds the limit.

All businesses that purchase, finance and/or lease less than $2 million in new or used business equipment during 2011, should qualify for the section 179 deduction.

If a business is unprofitable in 2011, and has no taxable income to use the deduction, that business can elect to use 100 percent bonus depreciation and carry-forward to a year when the business is profitable.

What's the difference between section 179 and bonus depreciation?

The most important difference is both new and used equipment qualify for a section 179 deduction (as long as the used equipment is "new to you"), while bonus depreciation covers new equipment only.

Bonus depreciation is useful to larger businesses spending more than $2 million on new capital equipment in 2011; also businesses with a net loss in 2011 qualify to deduct the cost of new equipment.

When applying these provisions, section 179 is generally taken first, followed by bonus depreciation -- unless the business has no taxable profit in 2011 (the unprofitable business is allowed to carry the loss forward to future years). The equipment, vehicle(s), and/or software must be used for business purposes more than 50 percent of the time to qualify for the section 179 seduction.

Almost all types of business equipment qualify for the section 179 deduction. All businesses need equipment on an ongoing basis, be it machinery, computers, software, office furniture, vehicles, or other tangible goods.

It's very likely that your business has purchased many of these goods during the past year, and will do so again and again. Section 179 is designed to make purchasing that equipment during 2011 financially attractive.

Remember, to qualify for the section 179 deduction, the below equipment must be purchased and put into use between Jan. 1, 2011, and Dec. 31, 2011.

Equipment (machines, etc.) purchased for business use

Tangible personal property used in business

Business vehicles with a gross vehicle weight in excess of 6,000 pounds

Computers

Computer software

Office furniture

Office equipment

Property attached to your building that is not a structural component of the building (i.e. large manufacturing tools and equipment)