Realize Tax Benefits With Year-End Equipment Financing
Financing options keep you flexible
Tax season is a few months away. It is time to start preparing.
Business leaders should consider acquiring new or remanufactured equipment before the end of 2017 to take advantage of legislation that both expands deductions and extends depreciation benefits for qualifying equipment purchases. In fact, tax benefits and favorable pricing make the fourth quarter of the year a particularly lucrative time for businesses to finance equipment.
Through financing programs, businesses can conserve cash and lines of credit while providing maximum flexibility. Entering into flexible payment programs at the end of the year is a smart way for companies to use any remaining budget while preparing for end of the calendar year. Consider the following factors when determining whether investing in capital equipment during the fourth quarter of the year aligns with your company’s strategic goals.
“Instead of spending a large amount of budget on equipment that will quickly depreciate in value, why not invest in other strategic and growth areas? When you do, you have immediate access to the technology you need without upfront costs.”
Beneficial for small businesses
Section 179 of the IRS tax code is an incentive created by the U.S. government to encourage businesses to invest in IT equipment. This covers accelerated write-offs for purchases and is particularly beneficial to smaller businesses with limited budgets. Effective January 1, 2017, businesses purchasing $2 million or less in capital equipment can deduct up to $500,000 of that expense immediately on their 2017 tax return. Financing can further enhance the bottom line by eliminating the upfront cash outlay typical of an equipment purchase while still preserving the Section 179 deduction. However, equipment must be financed and in place by midnight of December 31, 2017, to qualify for the 2017 tax year.
Companies requiring more than $2 million in capital equipment investment in 2017 will need to manage the tax ownership of those additional assets to maintain a Section 179 write-off. By using a tax lease for assets exceeding the $2 million threshold, the leasing company becomes the tax owner of the equipment, which allows businesses to maintain the maximum Section 179 deduction on the assets for which they retain tax ownership.
Extended bonus depreciation
Under the same tax legislation adopted by Congress for 2017, businesses of all sizes can depreciate 50 percent of the cost to acquire eligible equipment on their 2017 tax returns. This tax break has been extended through 2019, although it will phase down to 40 percent in 2018 and 30 percent in 2019.
For many businesses, asset depreciation plays an important role in fiscal management. Most equipment acquisitions offer depreciation benefits, but determining whether a company can effectively use all of that depreciation requires some consideration. This is especially true for equipment-intensive businesses. Full taxpayers in need of the sheltering effect of equipment depreciation will typically benefit from tax ownership of equipment. This can be accomplished with a loan, installment payment agreement, and some leases. All of these options allow the user to deduct depreciation and interest charges from taxable income.
Companies near to or already paying alternative minimum taxes should be aware of the implications of purchasing assets. These organizations may not be able to effectively use all of the tax benefits associated with accelerated equipment depreciation. Therefore, they can experience an increase in the after-tax cost of acquiring an asset. In contrast, a tax lease can minimize the creation of additional tax depreciation. The lessor records the equipment ownership and resulting depreciation, and because equipment leasing companies are able to more efficiently utilize the tax benefits associated with depreciation, the lessee can enjoy the savings in the form of lower monthly payments.
A tax lease may also be advantageous for corporations with expiring net operating loss, carryforwards or other similar tax credits. Depreciation deductions on purchased equipment reduce taxable income, sometimes preventing a business from fully using its available tax credits. Leasing allows companies to maximize the use of the credits to lower the tax liability. Tax benefits can be passed on to the customer in the form of lower payments.
Boost your bottom line
Leasing allows a company the freedom to obtain the equipment it needs, when necessary. With tax leases, companies avoid fourth quarter asset acquisition restrictions because the leasing company is the tax owner of the equipment. However, the business can still receive the tax benefits in the form of lower payments. Leasing can be a helpful option when project delays or unexpected equipment replacement needs arise in the fourth quarter.
There are many reasons to finance equipment at any time of the year, but companies interested in taking advantage of expanded tax benefits for 2017 and getting a head start on next year should consider financing new or updated equipment before December 31. It may be the best decision you make all year.
For help evaluating a year-end equipment purchase, please contact your local Cisco Capital FSM.
“Companies with a more complex tax situation may want to consider a tax lease. Tax leases effectively trade tax depreciation for lower payments. Additionally, tax leases allow the entire lease payment to be deducted as an operating expense on the business’ tax return.”
*Cisco and Cisco Capital do not provide tax or accounting advice to customers. Tax and accounting treatment is the sole responsibility of the customer.