Section 179 for Businesses Explained
As business owners, it’s important to stay ahead of the curve with the right equipment. While you don’t have to own the latest and greatest, your equipment has to get the job done. Not having the right equipment can make or break you. Luckily, Section 179 was created to encourage business owners to get the equipment they need and encourage growth by offering tax incentives.
Fun Fact: In the past, there were people who abused the section 179 in what ended up being called the SUV loophole, where many business owners ended up using section 179 to deduct personal luxury SUVs.
What is Section 179?
Section 179 is a section of IRS tax code allows you to deduct the full purchase price of the equipment from your gross income. Section 179 was included in the Stimulus Bill to help give tax relief to business owners. If used correctly, it can effectively change the your tax liability ( It can help turn around a year in the black. ) You don’t want to let these types of opportunities goto waste. Section 179 isn’t guaranteed, every year the stimulus bill has to get reapproved in order for the tax code to apply.
Section 179 for 2016 allows up to $500,000 to be deducted, but it varies from year to year.
How does it work?
Say you have a excavating company. Previously, you would buy some heavy equipment and slowly write it off on your taxes. Year by year, you get to deduct a little as the equipment depreciates. Lets say- it’s $100,000 piece of equipment, you’ll get to slowly write it off $10,000 at a time, over 10 years. So, the biggest benefit of section 179 is that you get to write off the entire purchase price in the year that you purchased. Why is this such a big deal? Being able to write off the entire amount of the $100,000 heavy equipment will help you discount the equipment $35,000. And that’s not all, you’ll get even more benefits if you finance or lease your equipment.
Why Lease or Finance?
Why lease or finance if you can afford to pay for the equipment in full? Because you get additional tax deductions. Oftentimes, your entire monthly lease payment is tax deductible and you can save 35% on your monthly payment. The difference between financing and leasing a piece of equipment is that financing only allows for the interest ( paid during the year ) to be deducted. Depending on your type of businesses, leasing might make more sense because of the tax savings rather than buying the equipment outright. However, when you apply the savings you get, you’ll realize the huge amount of discount you’re getting regardless of financing or leasing.
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Should I pay cash for my equipment if I can?
Even if you can afford to pay for your equipment in cash, doesn’t mean that you should. It’s not recommended by us. The tax benefits that come with financing or leasing the equipment just can’t be overlooked.
What kind of equipment qualifies?
- New, Preowned, or Refurbished Equipment
- Heavy Machinery
- Business Vehicles weighing over 6,000lb
- Office Equipment
- Medical Equipment (MRI machines, X-ray machines, and more)
Examples of Potential Equipment Savings
Section 179 can do wonders for your books, especially if your company is in need of positive cash flow. Check out this example..
$100,000 equipment purchase
Lease deposit required: 2 advance payments (around 5% or $5,000 of the total purchase price)
Estimated Tax Rate: 35%
2016 tax savings from Section 179: $35,000 ($100,000 x .35)
Total paid on lease in 2016: $5,000 (initial deposit) + $2,500 (2nd payment) = $7,500
Total cash flow generated: $27,500 ($35,000 – $7,500)
Are there any downsides or things to watch out for?
One thing that we recommend is working with a reputable lender in order to get the best rates. Often times, the rate gets overlooked and you don’t get the deal you originally imagined.
However, you also want to watch out for Deprecation Recapture . For instance, If you decide to sell your (paid off) equipment after claiming section 179 deductions within 3 years ( the time varies), you’ll owe a partial amount of deductions you received for that piece of equipment. Of course, this all varies and needs to be calculated by your accountant, but it’s just something that you want to watch out for.
Note: The information in this article is deemed accurate, however it’s no substitute for the counsel of a tax professional. Only they can determine your needs and apply the applicable tax benefits.
We work with dozens of different vendors in every field to offer equipment leasing options. If you’d like a free consultation on your options, give us a call at 1 (800) 341-1288 or email us at [email protected] .
If you want more information on equipment leasing vs financing – Check out our article The Benefits of Equipment Leasing Versus Purchasing.