Tax Savings Overview
When purchasing new storage tanks or upgrading your existing ones, there are currently 2 ways in which businesses may be eligible for tax savings.
#1- SECTION 179 DEDUCTION
Beginning in 1982, taxpayers have been allowed to elect to expense certain qualifying depreciable property placed in service that year, rather than depreciating over multiple years. This enables taxpayers to receive the full tax benefits of the purchase during the same year the purchase was made, rather than receiving a partial tax benefit over a long period of time. This applies to new and used equipment and can be combined with bonus depreciation.
The section 179 election is available only in the first year a property is placed in service.
Generally, qualifying property is tangible personal property purchased for use in the active conduct of a trade or business. To qualify, the property must be eligible for ACRS or MACRS.
Some Examples of Qualifying Property:
Office furnishings, equipment and computers
Coin operated vending machines.
Allowable Deduction for 2013:
For 2013, the Fiscal Cliff Legislation increased the allowable section 179 deduction to $500,000. This means that for 2013, companies can expense up to $500,000 in qualified purchases, given the total of qualified purchases do not exceed $2.5M.
The allowable Section 179 deduction is expected to be reduced to $25,000 in 2014 and bonus depreciation is scheduled to expire, it is important to take advantage of these important benefits in 2013.
Equipment Cost: $100,000
Section 179 Deduction: $100,000
50% Bonus Depreciation: $0
Normal 1st Year Depreciation: $0
Total 1st Year Depreciation: $100,000
Potential Tax Savings in 2013: $35,000
Equipment Cost After Tax Savings Year One: $65,000
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. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction
Paying Cash VS Leasing:
Contrary to popular belief, leasing equipment is more cost effective than paying cash 99% of the time. When a business pays cash for equipment, they are paying with “post tax” dollars, which essentially is like adding 35% (avg. marginal tax rate) to the sale price. Leasing allows you to use “pretax dollars” when purchasing equipment. The leasing company owns the equipment until paid off, and you are agreeing to a long-term rental agreement. Your lease payment can be written off as an expense.
Another factor is inflation. A dollar today is worth more than a dollar will be in the future. Therefore, leasing enables a business owner to retain a more valuable dollar today while making lease payments with a weaker dollar tomorrow.
Preserving Existing Capital:
Studies show that the average return on working capital is 10%. When you choose to use existing funds to purchase equipment rather than retaining those funds, you lose this opportunity. Most investments on equipment are considered income generating investments. Therefore, leasing enables you to generate a return on the working capital you preserved while generating income with the use of the equipment.
We recommend that you consult with your tax accountant prior to making any decisions, as tax situations for all companies can vary.