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Business Equipment - Section 179 Expensing Allowance  $139,000

Section 179 allows smaller business owners who acquire equipment for their business: machinery, computers, software, and other tangible goods, to immediately write off the full price of the equipment  rather  than depreciating them over several years.  Section 179 is ready to enhance your bottom line in 2012. If you've been thinking about buying new or used equipment for your business, then THIS is definitely the year to do it, because the government is going to give you a VERY generous tax deduction in 2012 (a tax deduction which is scheduled to be drastically reduced in 2013).  Section 179 applies to new and used equipment purchases, but must be "new to the business", and also includes certain software and vehicles.  Under Section 179, businesses that spend less than $560,000 a year on qualified equipment, may write-off up to $139,000 in 2012. The rules are designed for small companies, so the $139,000 deduction phases out when a business purchases more than $560,000 in one year. (Companies cannot write off more than their taxable income).

Bonus Depreciation - 50% for 2012 and Benefits of a Non-Tax/Capital Lease

The benefit of a Non-Tax/Capital Lease is that you can take advantage of Section 179: expense up to $139,000 if the equipment is put in use in 2012. In addition, you are allowed an additional 50% first-year depreciation on new equipment. Examples of Non-Tax/Capital Leases include a $1.00 Buyout Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. However, this is the final year for these kinds of limits – Section 179 is slated to decrease in 2013 (all the way down to $25,000!)  The sample calculation shows how taking advantage of Section 179 can significantly lower the true cost of the equipment.

Leasing and Section 179

Did you know that your company can lease equipment and still take full advantage of the Section 179 deduction? In fact, leasing equipment and/or software with the Section 179 deduction in mind is a preferred financial strategy for many businesses, as it can significantly help with not only cash flow, but with profits as well.

Advantages of Leasing and Financing

You can deduct the full amount of the equipment and/or software, without paying the full amount this year. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction (you are reading this correctly; in many cases, the deduction will actually be profit).

Tax Code Section Expense Detail
The election, which is made on IRS Form 4562, is for the tax year the property was placed in service or an amended return filed within the time prescribed by law. Section 179 property is property that you acquire by purchase (or capital lease) for use in the active conduct of your business. To ensure property qualifies, reference IRS 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 qualifying 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 December 31st. 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 the specific impact to your business or visit www.irs.gov.

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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 akin to 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 the lease.  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 (real FMV) do not qualify as tax preference items and have no adverse effect on AMT liability.

* NOTE: First Capital does not offer tax advice. Always consult a CPA for accounting guidance of these and other tax matters.

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