Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. That means that if you finance or lease a piece of equipment, you can deduct the FULL PURCHASE PRICE from your gross income.
Advantages of Tax Code 179
The main Advantage of Financing or leasing equipment is that 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. 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.
Understanding Section 179 Tax Deductions for 2021
For small business owners, Section 179 is one of the most relevant passages of the tax code. Simply put, this section of the tax code allows you to deduct part of all of the cost of equipment that you purchase or finance prior to December 31, 2021.
However, there are some complexities to Section 179 that small business owners must understand. Keep in mind that not all equipment will qualify for deduction. Here are a few guidelines to help you consider your own Section 179 tax deductions
Tax Deduction Limits 2021
As of right now, the deduction limit is $1,000,000 on qualifying equipment. Meanwhile, as a result of the Tax Cuts and Jobs Act, the limit on equipment purchases has been increased to $2.5 million. The same bill provides businesses with the opportunity to depreciate 100 percent of the cost of any eligible equipment that they have purchased or leased since September 27, 2017. This extends through 2022.
How to Get This Tax Deduction
The Section 179 tax deduction is available to businesses that have placed either new equipment or used equipment into service within the year that they purchased it, or within the year that they leased it.
However, it is crucial for business owners to know that this dedication is not automatic. You must proactively opt-in. To do so, it is mandatory to complete Part 1 of IRS form 4562. Fill out this form and file it with your business tax returns.
Also, keep in mind that not all types of equipment qualify. If you have any questions about qualifying equipment, we recommend talking with your business accountant, who can provide further guidance.
What Types of Equipment Qualify Under Section 179?
There are a number of types of equipment that qualify for deduction under Section 179 of the tax code. Generally speaking, these types of equipment may include:
- Business vehicles
- Business machinery
- Computers and Hardware
- Office equipment
To see a more comprehensive list of what is and is not qualified for the deduction, we recommend visiting the IRS website.
Equipment Financing and Section 179
One of the most common questions about Section 179 is whether or not you can claim a tax deduction for equipment that you have financed. The short answer is yes, Section 179 can work with equipment financing, just so long as the equipment in question meets the eligibility guidelines set forth by the IRS.
Equipment Leasing and Section 179
Did you know? Your tax savings may exceed your finance costs on a five year “lease to own” financing plan. The total of your first-year payments are likely LESS than your tax savings!
It is time to take advantage of your Section 179 tax credit. If your deduction creates an operating loss you may even be able to carry back the loss to generate a refund from prior years. This is a big change that many business owners are not taking advantage of – and it’s a mistake! Don’t miss out on this opportunity to purchase valuable equipment at a reduced cost to you.
Lease Analysis for EFA or $1 Option
$1,976/month Equipment lease payment based on 60 months, 2 payments in advance, $1 purchase option
118,560 total payments over 5 years
-35,000.00 tax savings from depreciation
-6,496.00 tax savings from interest deduction (.35 (tax rate) * 18,560))
$77,064 net cost of equipment
Net cash flow after 12 months (excluding tax savings from interest deduction)
$35,000.00 Tax Savings
-23,712.00 Equipment Lease Payments
$11,288 Positive cash flow or 47.6% return on investment! Compare that to paying cash… -$65,000.00 Cash flow!
Another important note for business owners: If you qualify for deferred payment equipment financing, you can take advantage of Tax Code 179 without any upfront costs. This allows you to purchase equipment without payments for three to six months while reducing your taxable income by the amount of the equipment cost. Here is the article of the program you can reference.
More Questions About Equipment Financing?
If you have any further questions about equipment financing, deferred payment programs, or other ways to make your equipment purchases more affordable, we welcome you to contact BNC Finance.
This information is intended strictly for informational purposes and is not meant to constitute tax, legal, investment, or accounting advice. Consult with your business accountant, attorney, or tax preparer before making any business decisions or before moving forward with business financing.
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