How it Affects Leasing and Your Business Taxes
Increased Section 179 limits
The Small Business Jobs Act of 2010 was enacted on September 27, 2010. The tax provisions in this Act provide some significant benefits to businesses, including: extension of bonus depreciation, increase in assets that can be expensed, carryback of unused general business credits, increase in start-up deductions, addition of cell phones to deductions, and relaxed penalty for failure to include reportable information with your return.
How Do These Tax Changes Affect Leasing?
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by the U.S. Government to encourage businesses to buy equipment and invest in themselves.
Section 179 limits for 2011 were increased by the Jobs Act of 2010 – allowing businesses to write-off up to $500,000 of qualified capital expenditures subject to a dollar-for-dollar phase-out once these expenditures exceed $2 million.
Did you know that your company can lease equipment and still take full advantage of the Section 179 deduction? In fact, leasing equipment with the Section 179 deduction in mind is a preferred financial strategy for many businesses, as it can significantly help with not only cash flow, but with profits as well.
Non-Tax | Capital Lease
The main benefit of a non-tax capital lease is that you can still take full advantage of the Section 179 deduction, yet make smaller payments. With a non-tax capital lease you can acquire and write off up to $500,000 worth of equipment this year, without actually spending $500,000 this year. A small business that is managing cash flow can leverage a non-tax capital lease and still take the Section 179 Deduction.
Examples of non-tax capital leases include a “$1 Buyout Lease” and a “10% Purchase Upon Termination (PUT) Lease.” In many cases, the amount you save in taxes will be MORE than the total of your first year’s payments.
As always, we recommend that you discuss any tax ramifications with your accountant or tax advisor.
Special depreciation allowance for certain property
The act extends for one year, the first year, a special depreciation allowance for certain qualified property (defined below). The allowance is an additional deduction of 50% of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction).
Property that qualifies for this special depreciation allowance include the following:
- Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less
- Water utility property
- Off-the-shelf computer software
- Qualified leasehold improvement property (Property must meet certain date requirements, such as purchase date, date placed in service and the original use must begin with you.)
Property that does not qualify for special depreciation allowance include the following:
- Property placed in service and disposed of in the same tax year.
- Property converted from business use to personal use in the same tax year it is acquired. Property converted from personal use to business use in the same or later tax year may be.
- Depreciation limits on business qualified GO Zone property.
- Property required to be depreciated under the alternative depreciation system (ADS).
- Property included in a class of property for which you elected not to claim the special depreciation allowance – vehicles.
Depreciation for business vehicles
The total depreciation deduction (including the section 179 deduction) you can take for a business automobile in the first year is increased by $8,000 ($11,060 for autos and $11,160 for light trucks or vans). The vehicle must be acquired and put into service in 2010.
Caution. These limits are reduced if the business use of the vehicle is less than 100%.
This Act provides businesses some immense benefits. Make sure to discuss these benefits with your tax advisor. For more information on the Small Business Jobs Act of 2010, visit Irs.gov.
*Sources: Internal Revenue Service and Wipfli CPAs and Consultants
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