Changes in Section 179 of the Internal Revenue Service (IRS) tax code take effect for the 2018 tax year. These changes are anticipated to benefit the bottom lines of those who can now deduct the full amount of equipment financed through a capital lease in the tax year it is placed into service compared to depreciating its value over several years.
Under Section 179, there are requirements that must be met in order to deduct equipment’s full purchase price from your gross income in 2018.
If your lease meets the requirements of the IRS’s capital lease definition, now what? You can deduct the full purchase price in the year it’s placed into service. In many cases, the tax savings from this year-one deduction will boost your bank account balance more so than if you hadn’t financed the equipment in the first place. Meaning the amount you save in taxes can exceed the amount you spend on lease payments.
An example of how this bottom-line friendly deduction plays out in reality:
|Section 179 deduction:||$400,000|
|1st year depreciation:||$0|
|(Assumes double declining ½ year convention)|
|Final adjusted basis:||$0|
|Total 1st year deduction:||$400,000|
|(Assumes 35% tax bracket)|
|Equipment cost after savings:||$260,000|
|Percentage discount due to tax savings:||35%|
There are a few limits…
The amount that can be written off is $1 million in 2018. On purchases over $2.5 million, the Section 179 deductions decrease dollar for dollar. After the Section 179 benefits are exhausted, bonus depreciation of 100 percent can now be taken until 2022 on the remaining amount of equipment placed into service.
Bottom line: The specific wording and terms of your lease contract could mean the difference between capitalizing an asset or taking a direct deduction for lease payments. Therefore, determining the classification (capital or operating) of a lease before the lease is signed can be a crucial tax planning tool and help you generate maximum tax savings.
If the time is right for you to invest in equipment to grow your business and reap maximum tax savings, talk to us at Global Financial & Leasing Services (GFLS).