According to the IRS web site, “The Section 179 deduction applies to tangible property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property.”
Section 179 allows businesses to deduct the full purchase price of qualifying equipment in the year it was put into service. This creates a larger initial expense deduction (and all in the same tax year) than using a standard depreciation method, which in turn reduces the tax burden for the company.
This is a potential game-changer for companies needing to make a capital-heavy investment.
Whereas in the past, all big expenses would be depreciated over a number of years and, in turn, keep your tax liability high. Now, using Section 179 with an Equipment Lease or an Equipment Financing Agreement might be the most profitable decision you make this year.
Why? Because the decreased tax liability that comes with the deduction will almost always exceed your cash outlay for the year when you combine a properly structured Equipment Lease or Equipment Finance Agreement with a full Section 179 deduction. It increases your bottom line enhancing while allowing you to add new equipment, vehicles, and/or software to your business.
Now Section 179 doesn’t apply to everything. For expenses to qualify as Section 179 deductions, they must be:
- Tangible. Physical property such as furniture, equipment, and (off the shelf) computer software will qualify for Section 179. By contrast, assets considered intangible (such as patents or copyrights) do not. While buildings, structures, and land won’t qualify for Section 179, some equipment attached to the building does. This includes things like sprinkler systems, alarms, and climate control machinery.
- Used more than 50% in your business. This means that equipment or property used mostly for personal reasons will not qualify..
- Not acquired from a related party. This means no double-dipping! Your purchase will not qualify for Section 179 deduction if it also benefits family, relatives, or organizations with whom you have a relationship.
Equipment eligible for the Section 179 deduction includes heavy equipment and machinery, office and computer equipment, off-the-shelf software, some vehicles for business use, and more. It’s always a good idea to check with your tax or legal advisor for specifics.
This means that if the equipment qualifies as a depreciable asset under Section 168, and is acquired for use in the operation of the business, it fits the criteria as a Section 179 deduction.
In addition to the Section 179 deduction, you may also be able to take an additional first-year bonus depreciation of 100% on business property that is new to your business. Bonus depreciation remains at 100% until January 1, 2023.
For tax year 2020, the IRS has increased the maximum deduction and the maximum amount of equipment that can be purchased by approximately 4%. This increase compares to the cost of living allowance implemented in the previous two years combined.
Some other Section 179 benchmarks to consider for the 2020 tax year:
- Maximum amount that can be deducted is $1,040,000
- Maximum amount of equipment that can be purchased (and take the full deduction) is $2,590,000
- Equipment must be placed into service no later than December 31, 2020
One advantage to leasing or financing equipment and/or software and then taking the Section 179 Deduction is that you can deduct the full amount of the equipment and/or software, without paying the full amount this year. What’s more, the amount you save in taxes can actually exceed the payments owed, making Section 179 a very bottom-line friendly deduction. Yes, you read that correctly… in many cases, the tax savings from the deduction will make your bank account larger than if you never financed the equipment in the first place. It means you can augment your business capacity and increase the bottom line at the same time.
Your company can also lease equipment and still take full advantage of the Section 179 deduction.
The primary benefit of a non-tax capital lease is that you can benefit from the Section 179 Deduction, yet make smaller payments on your equipment. With a non-tax capital lease you can acquire and write-off up to the deduction limit worth of equipment this year, without actually spending that amount this year.
In other words, a small business that is managing cash flow can leverage a non-tax capital lease to minimize out-of-pocket cash, and still take the full Section 179 Deduction.
Ready to make full use of the Section 179 deduction? Then start planning now to take advantage of non-tax capital investment.
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