Tax Benefits of Financing

By September 29, 2009Financing

Business Equipment Purchases

Business owners who buy capital equipment – machinery, computers, and other tangible goods, usually prefer to deduct the cost in a single tax year, rather than a small amount over a number of years. Federal tax law lets small businesses accelerate depreciation under tax code Section 179 for qualified property.

Benefits of Non-Tax Leases

Non-Tax/Capital Lease. The benefit of this lease type is the ability to take advantage of IRC Section 179 and expense up to the amount allowed for the year that the equipment is installed. You may depreciate any excess on the depreciation schedule for that particular asset. Examples of this type of lease include $1.00 Buyout, 10% Purchase Upon Termination (PUT).

Example: Equipment is financed and put in use in 2008 and the cost is $275,000. Using Section 179 and assuming a 35% tax bracket, net savings on the equipment would be:

Equipment Cost:$250,000
1st Year Write Off
Section 179
($250,000 is maximum write-off)
$250,000
50% Bonus
($275,000-$250,000 = $25,000 $25,000 x 50% = $12,500)
$12,500
Regular MACRS
($12,500 x 20% = $2,500)
$2,500
Total 1 st Year Deduction
($250,000 + $15,000 = $265,000)
$265,000
Tax Savings Assuming Rate of 35%
($265,000 x 35% = $92,750)
$92,750
1st Year Bottom Line Equipment Cost
($275,000 – $92,750 = $182,250)