The Equipment Leasing Experts - Our 21st Year!

 Under IRS Section 179, equipment purchases of up to $108,000* can be expensed (deducted from taxable income) in the first year eligible property is placed in service in a trade or business.  Capital leases ($1.00 buyout) qualify for this deduction in their year of inception. The 2003 law quadrupled the amount of qualified property that can be expensed under IRS Section 179 from $24,000 to $100,000 (indexed for inflation) for tax years 2003, 2004, and 2006. The American Job Creation Act of 2004 has extended the use of the $100,000 (currently up to $108,000) ceiling for two more years, through 2007. Qualifying property now also includes off-the-shelf computer software.
 

Any purchase in excess of $430,000* (indexed for inflation) reduces the $108,000* Section 179 limit (dollar amounts are indexed for inflation). For example, if you purchase $440,000 in qualifying property, the Section 179 deduction is limited to $98,000.

 The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income (determined after application of the investment limitation) derived from the active conduct of any trade or business during the tax year. Costs disallowed under this rule however, may be carried forward an unlimited number of years subject to the ceiling amount for each year.

 The maximum amount of asset cost that can be expensed by year is: $108,000* for 2006 through 2007.  For example, if you purchase or lease a piece of equipment for $45,000 and install it in 2006, you are eligible to take a $45,000 tax deduction in the respective year.

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The key component of a FMV lease is that the lessee has the option to return the equipment at the conclusion of the lease--without further obligation.  The lessee may also have the option to purchase the equipment for its "fair market value" or to continue leasing the equipment from the lessor.  "Technically," the lessee does not own the equipment--it is more like a rental. The lessee does not record the equipment as an asset on its balance sheet, nor does the lessee record a long term liability. The lease is generally treated as an off-balance sheet, "operating expense" and hence, it is 100% TAX DEDUCTIBLE.

With a cash, bank loan or finance type lease purchase you normally recapture some of your cash expenses by claiming depreciation on the equipment according to the IRS accepted "useful life" of that equipment.  You may also claim the interest portion as an expense during the term of any repayment.  Depreciation, however, can be spread over 5-7 years on long-lived equipment.  The same equipment on an FMV lease can (effectively) be 100% expensed during whatever lease term you select.  For example: you enter into a 36 month FMV lease on equipment that would otherwise have to be depreciated over say, 5 years and you will effectively have written off all of its value (less residual) in just 3 years, instead of 5!

Under the Tax Reform Act of 1986 Congress took aim at small to medium sized businesses that had been reducing their overall tax liability by claiming depreciation on equipment they had acquired.  Although the subject is rather complex, the net effect is that companies who have used equipment depreciation to significantly lower their tax liability are subject to a review that may have the effect of classifying some of those depreciation write-offs as "tax preferences" and subjecting those same companies to an additional "Alternative Minimum Tax," in addition to the taxes they would otherwise owe.  Owning or purchasing too much equipment, while lowering the traditional tax component, can now trigger the addition of new added taxes.  The good news: Equipment lease payments that are treated as rentals do not qualify as tax preference items and have no adverse effect on AMT liability.

* NOTE: Always consult an accounting professional on these and other tax matters.

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