The Ins and Outs of Section 179
Of the various tax breaks small business owners can take advantage of, those offered under Section 179 relating to small business equipment leasing may be the most beneficial.
The tax section for small business
Section 179 of the United States tax code was designed to help small businesses. It not only allows owners to deduct the full amount of the purchase price of equipment up to specific limits, it provides unique advantages for owners who decide to finance equipment as well.
Unlike some areas of the Internal Revenue Code, claiming under Section 179 is easy. Small business owners simply have to buy or lease the equipment they need and then fill out the relevant IRS form.
While most types of equipment are valid under Section 179, it does pay to understand exactly what qualifies. Eligible property includes tangible personal property, such as machinery, other tangible property, excluding buildings and structural components, except in certain instances, and off-the-shelf computer software, according to the IRS.
The property must also be acquired specifically for business use.
Beyond tax deductions
While Section 179 certainly provides benefits to business owners who buy equipment outright, leasing can offer even more advantages.
First, since the federal government considers leased equipment to be an off-balance sheet operating expense, it gives owners the chance to make their lease payments 100 percent tax deductible.
Beyond this, owners also have a chance to accelerate the depreciation of their equipment, which in turn offers further tax benefits. If business owners purchase equipment, depreciation is based on the life of the equipment. However, leasing allows owners to expense 100 percent of depreciation based on the term of the lease rather than the life of the equipment.
Of course, different types of equipment leases offer much more in addition to the chance to reduce tax burdens. For business owners who may not have the funds necessary to buy necessary equipment outright, leasing it becomes an ideal solution. However, even owners who do have the funds needed may find that leasing is a preferable option, as it allows them to avoid depleting funds that may be required down the line.
Additionally, leasing equipment gives owners more flexibility for changing and upgrading machinery. For businesses that rely heavily on equipment, this can be an invaluable bonus.
Together with speculation that the IRS may raise the deduction threshold for equipment to $500,000 again, there are plenty of reasons for business owners to explore their options under Section 179. Chatting with a tax advisor could help owners determine if they’re missing out on tax reduction opportunities.