Running a company that requires an extensive array of equipment not only necessitates a major up-front capital expense, but over time, depreciation can greatly diminish the resale value of the machinery. For small businesses like skilled trade specialists and local construction firms, these costs, and the unrealized value of depreciating equipment can really a hurt a company’s bottom line. Instead of going out to pay the full up-front cost of new machinery that may not recoup a good resale price, it can often be a better option to lease the equipment.
The downside of depreciation
The process of utilizing depreciation works best for big businesses that can afford to dedicate significant portions of their time and capital resources to purchasing and reselling equipment. However, small businesses are often constrained in the extent of their capabilities by budgetary restrictions. Going through the process of identifying depreciation and ensuring the property meets the strict guidelines outlined by the IRS in and of itself can be a time-consuming process that wastes precious resources. And then actually locating buyers and finalizing the transaction is equally long and draining.
Further, owners can go through all the steps to see if their equipment qualifies for depreciation, only to find that it doesn’t, thereby disallowing them to write off the depreciation. According to the IRS, a taxpayer cannot depreciate the value of equipment for the following reasons:
- If the equipment was put to use and disposed of in the same calendar year
- If the equipment was used to build capital improvements to the business
- Additional term interests
These limitations and restrictions can leave small business owners holding the bag and not receiving all the deductions they would have received for the depreciated machinery otherwise. As noted by the Houston Chronicle’s Small Business, selling equipment before its allowed on the IRS’s depreciation schedule won’t provide the full cost of the resale. This can leave a small business stuck with old, outdate tools and machinery.
Benefits of leasing
Instead of purchasing costly equipment that may not fetch a solid price, leasing lets owners avoid the expensive up-front cost and provides and additional advantages, such as tax breaks and constant upgrades.
With small businesses already subject to so many different costs and expenses, any little bit of additional savings is a welcomed with open arms. By utilizing Section 179 of the IRS Tax Code, small business owners can deduct the cost of leasing equipment payments as an operational expense up to $500,000. With Congress recently increasing the deduction limit from $25,000 to the current $500,000 permanently, small businesses can use the savings to reinvest in the company and also create better long-term financial projections. As noted by Section179.org, this exemption can even generate profit.
Everyone loves having the latest and greatest toys and gadgets. This is especially true for businesses, where purchasing the most up-to-date equipment can give the company a crucial competitive edge over industry peers. Unfortunately, many small businesses simply do not have the luxury or financial capabilities to constantly upgrade their machinery every year.
Thankfully, small businesses that utilize equipment leasing opportunities gain the ability to keep these machines as current as possible, with regular upgrades when new models hit the market. Having to sell the equipment every time an upgraded machine comes out can be difficult, since it eats up precious time seeking out potential buyers. Worse, owners might not get the full value of the equipment due to depreciation, thereby leaving the company with a significant financial loss.
Further, many equipment leasing providers offer training for employees to learn how to use this new machinery. This not only helps the small business save money by training its staff, but it also guarantees the workers understand how to properly use the equipment, thereby reducing machine downtime and ultimately boosting productivity levels.