TAX BENEFITS of LEASING

Section 179 Explained

Business Equipment

Business owners who acquire equipment for their business: machinery, computers, and other tangible goods, usually prefer to deduct the cost in a single tax year, rather than a little at a time over a number of years. This deduction is known by its section in the tax code, a Section 179 deduction.

Under Section 179, businesses that spend less than $800,000 a year on qualified equipment, can write off up to $250,000 in 2008. The rules are designed for small companies, so the $250,000 deduction phases out when a business purchases more than $800,000 in one year. (Companies cannot write off more than their taxable income.)

Benefits of a Non-Tax/Capital Lease

The benefit of a Non-Tax/Capital Lease is that it can take advantage of Section 179: expense up to $250,000 if the equipment is put in use in 2008. In addition, you may depreciate any excess on the depreciation schedule for that asset. Examples of Non-Tax/Capital Lease include a $1.00 Buyout Lease, Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. Example Calculation: Assume you finance $300,000 worth of business equipment, put it in use in 2008, and take advantage of Section 179. Your tax savings could be significant...

Tax Savings Example - Section 179 Deduction

Cost of Equipment: $300,000.00

Section 179 Deduction: 250,000.00

50% Bonus Depreciation: 25,000.00

Regular First Year Depreciation Deduction: 5,000.00

Total First Year Deduction: 280,000.00

Cash Savings on your Equipment purchase: 98,000.00
(Assuming a 35% Tax Bracket)

Lowered Cost of Equipment After Tax Savings $202,000.00

Tax Code Section 179 & Election to Expense Detail

The election, which is made on Form 4562, is for the tax year the property was placed in service or an amended return filed within the time prescribed by law. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. Section 179 property is property that you acquire by purchase for use in the active conduct of your business. To ensure property qualifies, refernce Publication 946.

This expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifing property as an expense rather than a capital expenditure. Under Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by Decmber 31st. Non-Tax leases qualify for this deduction in their year of inception. Any excess above the expensed amount can be depreciated depending on the equipment type. Not all states follow federal law. Contact your tax advisor for further details or visit www.irs.gov for specific detail.

Advantages of Leasing

The laws affect nearly every aspect of your business-including the way you handle equipment acquisitions. Under the tax law, accelerated depreciation can trigger the new Alternative Minimum Tax (AMT)-leasing may help you reduce the impact of this 20% tax.

Under old laws, the Investment Tax Credit and the Accelerated Cost Recovery System (ACRS) gave incentive to big ticket purchasers. Now, leasing-the preferred method of acquiring equipment-has even more advantages!

What is SECTION 179?:

Section 179 is a portion of the IRS tax code implemented on an annual basis that allows certain deductions to business owners who make capital purchases within a particular fiscal year. 179 was developed and designed as a way to stimulate the economy by rewarding business owners who proactively take the appropriate steps in growing their business through capital acquisitions. Section 179 accelerates depreciation up to 100% for the first year.

Why is it important during the 4th Quarter?:

Section 179 is especially important in the fourth quarter because business owners typically have a better handle on what their profitability looks like and what kind of deductions would make sense to increase their tax savings. Additionally, business owners will also know if they have any extra money in the budget for capital acquisitions.

Which companies can benefit?:

Companies most likely to benefit from the 179 tax code are small to mid-sized businesses that have marginal profitability and could use a tax break. It makes the most sense for them to lease equipment so that they can save cash on hand, receive the aforementioned tax benefit, and acquire a new piece of equipment that may be vital for growth.

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