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On February 17, 2009 the ARRA (American Recovery and Reinvestment Act of 2009) was passed by legislation as an Economic Stimulus Act. This act preserves the expanded Section 179 deductions for equipment purchased during 2009 (after December 31, 2008 and before January 1, 2010). The law states that the amount of qualified capital equipment that businesses can expense under Section 179 is $250,000. This incentive is geared toward small businesses so the deduction phases out when a business purchases more than $800,000 in one year. For example, with an $800,000 capital equipment purchase the first $250,000 can be 100% expensed and the remaining $550,000 will be depreciated normally. An exception to this rule is that a company cannot write off more than their taxable income.
In addition to the Section 179 benefits there is also a bonus depreciation of 50% for qualifying assets (in addition to the regular first-year depreciation). How does this affect your business? When you combine the rule of Section 179 with the 50% bonus boost, the tax savings are tremendous. This will allow you to lower the true cost of ownership on your business equipment! Non-Tax/Capital leases allow you to take advantage of these opportunities. Here is an example:
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1st Year Write Off:
($250,000 is the maximum Section 179 write-off in 2008) |
$250,000 |
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50% Bonus Depreciation:
(On remaining value: $300,000 - $250,000 = $50,000; $50,000 x 50% = $25,000) |
$25,000 |
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Normal 1st Year Depreciation:
(Depreciation calculated at 5 years = 20%; $25,000 x 20% = $5,000 |
$5,000 |
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Total 1st Year Deduction:
($250,000 + $25,000 + $5,000 = $280,000) |
$280,000 |
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Tax Savings Assuming Rate of 35%
($280,000 x .35 = $98,000) |
$98,000 |
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1st Year Net Cost after Tax Savings:
($300,000 - $98,000 = $202,000) |
$202,000 |
Examples of Non-Tax/Capital leases are; $1.00 Buyout, and Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination Lease (PUT).
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. Section 179 property is property that you acquire by purchase for use in the active conduct of your business. To ensure property qualifies, reference 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. 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 detail or visit www.irs.gov for specific detail.
If a lease is a Tax Lease/True Lease, the lessor retains ownership and you, as the lessee, may be allowed to claim the entire amount of the monthly investment as a tax deduction. Many rental contracts qualify as a true lease including a 10% Option and a Fair Market Value Lease.
Example Calculation: Assume that you have a Tax/True Lease with a $1,000 monthly payment, the below tax savings may be available:
Monthly investment = $ 1,000
Finance Term = 36 months
Tax bracket = 35%
Monthly tax savings = $1,000 x .35 = $350.00
Total tax savings over the term of the contract = $12,600.00
To take advantage of the 2009 incentives and the substantial tax savings, your business equipment must be put in use by year-end. Please contact your tax advisor to learn about the specific impact to your business. For complete details, or changes to the tax incentives, please visit www.IRS.gov or contact the IRS help line at 800-829-4933.
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