Business owners who acquire new or used equipment and software for their business usually prefer to expense the cost in a single tax year, rather than depreciate a little at a time over a number of years. This deduction is known by its section in the tax code, a Section 179 deduction. Under Section 179, businesses that spend less than $560,000 over the year on qualified equipment, can accelerate depreciation expense 100% up to $139,000 in 2012. The rules are designed for smaller companies, so the $139,000 deduction phases out dollar for dollar when a business purchases more than $560,000 in equipment and software this year. (i.e., If a company purchases $600,000 in qualified equipment in 2012, they can only accelerate depreciation expense up to $99,000.) 50% bonus depreciation is also available for new equipment purchases for those amounts not covered by Section 179.
Non-Tax/Capital Leases can take advantage of Section 179, expensing up to $139,000 for equipment put in use in 2012. In addition, you may depreciate any excess on the depreciation schedule for that asset or utilize the 50% bonus depreciation for 2012. Examples of Non-Tax/Capital Leases include a $1.00 Buyout Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. Example Calculation: Assume you finance $200,000 worth of business equipment, put it in use in 2012, and take advantage of Section 179. Your tax savings could be significant:
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 that may be available:
To take advantage of the 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.
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