What are the tax benefits of leasing computer equipment? The answer to this question might actually surprise you.
We no longer live in the era where you can double the usefulness of your computer by adding another megabyte of Random Access Memory. There are many sophisticated media and apps being created everyday and this has put a great demand on computers. This has led to many companies leasing rather than purchasing their computer equipment. Equipment leasing contracts have favorable tax treatment and this is one of the many benefits of computer leasing.
Tax Benefits Of Leasing Computer Equipment
In order for you to understand the tax advantages of computer leasing, you must first of all understand what depreciation is. If you incur an expense during a financial year, you’re allowed to subtract business expenses against income. You must however stretch your deduction over several years, for certain kinds of capital equipment. This process is what is known as depreciation. You must spread your deductions over 5 years for computer equipment and most of the time this will lead to getting stuck with outdated equipment.
The tax treatment in America is favorable and simple. Lease payments are fully tax deductible against any incurred income. This is very different from purchasing equipment where purchasing equipment is only tax deductible over a period of time based on government depreciation rates.
Depreciation rates usually vary depending on the timing of the purchase, its business use and the type of equipment. Tax deductions for depreciation will vary every year because of these restrictions. Lease deductions, on the other hand, will remain constant.
Moreover, there is allowable depreciation during the first year of purchase and this may lead to a very low tax deduction in the year that you acquire the equipment, more so, if you purchase the equipment early in the year.
Tax deductions on the equipment that you lease will be a reflection of your actual cash flow and tax deductions on purchased equipment will not. This may interrupt your cash flow. Leasing offers business owners full deduction of lease payments against current income and preserves capital that would not be available on huge capital acquisitions.
Section 179 Depreciation Deduction
Section 179 is a section in the IRS tax code that permits businesses to deduct full lease payments of financed computer equipment during a tax year. This means that if you lease a piece of qualifying computer equipment, you can subtract full lease payments from your gross income. Many businesses are today taking full advantage of Section 179.
Using section 179 with a computer equipment lease might be the most profitable decision for your business in 2013. This is because when you combine the full Section 179 deduction and include a properly structured lease agreement, the amount deductible will exceed your cash outlay for 2013.
For every $10, 000 you finance, you are eligible for a bonus of $179 and this is available until 31st Dec 2013. This means that if you lease your computers now, you stand a chance to benefit from Section 179 deduction.
Wondering if you qualify for Section 179? If you plan on leasing computer equipment worth less than $2, 000, 000 in the 2013 tax year, then you are eligible for the Section 179 Deduction. If your business has incurred a net operating loss and it does not have taxable income to use the deduction, then you can choose to carry forward to a year when your business is profitable or use 50% Bonus Depreciation.
There is a very big difference between Bonus Depreciation and Section 179. The Bonus Depreciation covers only new equipment while both used and new equipment qualifies for Section 179 Deduction.
To ensure that your business gets full tax savings, then you need to choose to use Section 179 Deduction if you are a medium or small sized business that has leased equipment and used it in 2013, but remember that deduction is not automatic.
You have to file your tax return for the year. Simply fill out Part 1 of the IRS form 4562 and add it to your tax return. You can tell your tax advisor to prepare the form for you or you can download it free from the IRS website.
LeaseQ understands the importance of Section 179 and can help you take advantage of the opportunities when leasing computer equipment.
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