If businesses looked into obtaining equipment through a capital lease, they would be able to get all the equipment they need under favorable financial conditions.
Many start up businesses use a huge chunk of their startup capital to purchase equipment that they need to get the business up and running. A capital lease gives them a means of obtaining this equipment without tying up their startup capital in equipment. Not to mention that due to special tax considerations, they would get a significant tax break at the end of the year.
Outright Purchasing Versus Capital Lease
If you are just starting your business, you most likely have limited funds. This is very unfortunate but it is a fact that exists in the business world. If you were to go about making outright purchases on all the equipment that you needed, it would mean cutting your startup funds in half.
Purchasing office equipment, manufacturing equipment and any other equipment you need in your business is not a cheap venture. You may be able to get warranties for the equipment purchased but once it expires, you will be left to shoulder the cost of repairs, maintenance and upgrades. Moreover, there are only so many things that your warranties can cover. At the end of the year, your equipment becomes subject to depreciation and taxation.
All this can change when you sign a capital lease. Contrary to what many people think, you can lease-to-own. This means that at the end of the lease period, ownership of the equipment is transferred to you. So instead of laying out all your cash at once, you can make smaller payments (usually known as monthly lease payments) which will be considered as a down payment for the equipment.
This will make it much easier on your operating budget. The equipment leasing company will take care of the repair, maintenance and upgrades. What’s more is that depreciation will not be applied at the end of the financial year because ownership is still between you and the lessor.
However, under section 179, your equipment will be considered as a purchase and it will count towards the tax benefits that all businesses receive every year.
Advantages Of Section 179
Section 179 was created to give small businesses encouragement to invest more capital through purchases. It was designed to benefit smaller businesses rather than large ones.
As of 2013 tax year, section 179 offered tax deductions for purchases of up to $500, 000 per year. This prevented businesses from losing money through depreciation deductions over time. Recent changes allow you 100% of what could have been lost to be taken up as a deduction.
The standards of what was considered a purchase was extended to include equipment leasing, which gave businesses a chance to purchase equipment without laying out all their cash at once.
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The full cost of purchasing the equipment according to the provisions in the lease contract still count as if the equipment has been purchased upfront, instead of over a period of time. You can read the IRS Publication 946 to find out what is considered as a deduction.
Section 179 was started in 2002. Back then, it had a limit of just $2500 for purchase deductions. The bonus depreciation deduction was not even heard of. Over the years there have been some major changes. The changes were meant to encourage small businesses to invest and grow. Sadly, those changes are about to come to an end.
For the calendar year of 2011, the maximum limit for equipment purchase was $500, 000 including any active capital lease you had. The bonus deduction for depreciation was at 100%. All you had to do was ensure that the equipment you acquired was in service by December 31st.
The deduction limit for 2012 and 2013 was $500, 000 while the maximum limit on equipment purchases was $2million. This means that if you purchased equipment during tax year 2013, you were eligible for a 50% bonus depreciation.
For the upcoming 2014 tax year, section 179 has gone back to its original limit of $25, 000.
As you can see, you can save your business thousands of dollars with a capital lease. However, before you sign a lease agreement, ensure that you speak with a trusted financial advisor.
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