August 11, 2008

Learn About Your Available Tax Savings With IRS Section 179 (2009)

Want to lower the true cost of ownership on your business equipment?

Here’s how:

Business Equipment
Business owners who acquire 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 $800,000 a year on qualified equipment, can accelerate depreciation expense up to $250,000 in 2009.

The rules are designed for small companies, so the $250,000 deduction phases out dollar for dollar when a business purchases more than $800,000 in equipment and software in one year.
(i.e., If a company purchases $900,000 in qualified equipment in 2008, they can only accelerate depreciation expense up to $150,000)

Benefits of a Non-Tax/Capital Lease
The benefit of a Non-Tax/Capital Lease is that it can take advantage of Section 179: expense up to $250,000 if the equipment is put in use in 2009. In addition, you may depreciate any excess on the depreciation schedule for that asset or utilize the 50% bonus depreciation for 2008. 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 $300,000 worth of business equipment, put it in use in 2008, and take advantage of Section 179. Your tax savings could be significant:

Equipment Cost Example: $300,000

2008 Accelerated Depreciation: $ 250,000
($250,000 is the maximum Section 179 write-off in 2008)

2008 50% Bonus Depreciation: $ 25,000
($300,000-$250,000 = $50,000 x 50% = $25,000)

2008 Accelerated Depreciation Expense: $ 275,000
($250,000 + $25,000 = $275,000)

2008 Tax Savings Assuming Rate of 35%: $ 96,250
($275,000 x .35 = $96,250)

2008 Savings / Lowered Equipment Cost: $ 203,750
($300,000 - $96,250 = $203,750)

The example above shows how taking advantage of Section 179 can significantly lower the true cost of equipment ownership from $300,000 to $203,750
For the specific impact to your company, please contact your tax advisor.

Note:
For complete details, or changes to the tax incentives, please visit
www.irs.gov or contact the IRS helpline at: 800-829-4933

Non-Tax/Capital Lease
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 noncorporate 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.

Tax/True Lease Benefits
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 – check out the tax savings that may be available:

Example:

Monthly investment = $ 1,000
Finance Term = 36 months
Tax bracket = 35%
Monthly tax savings = $1,000 x .35 = $350
Total tax savings over the term of the contract = $12,600

Further Detail

Reminder: to take advantage of the 2009 tax incentives, your business equipment must be put in use by year-end. Each company should contact their tax advisor to learn about the specific impact to your business.