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LEASING + IRS 179 DEDUCTION

Jump into Tax Savings……

Leasing and IRS 179 Deduction

Cash Flow

Conserving cash flow is one of the most common reason companies elect to lease rather than pay cash for equipment acquisition.  The provisions of IRS section 179 allow companies to fully expense tangible property in the year it is placed into service.  Can companies leasing new equipment and still take an IRS Section 179 deduction? The answer is most definitely YES.

Property Eligible For Electing a Section 179 Deduction

• Computer and Peripherals
• Communications and Networking Equipment
• Point of Sale Systems
• Plastic Card Generation Equipment
• Audio and Video Systems
• Power Management Equipment
• Furniture and Fixtures
• Off the-shelf Software

Benefits

• For 2008 tax year, companies may take a one-time expense deduction of $ 250,000
• Special depreciation allowance – an additional deduction of 50% of the property’s depreciable basis in the first year.
• Help manage cash flow and pay lower taxes this year
• Lowers adjusted gross income, which could help companies qualify for various deductions that are limited by AGI
• Lowers earned income which can increase companies’ earned income credit.

Analysis

Paying cash for acquiring an asset uses up working capital that could be used more effectively operating the business.  If a company elects to lease the asset with a capital lease, then it can still elect to take the section 179 deduction.  Additionally, the company does not tie up a lot of working capital.  In this case, after the first year we have an after tax benefit (positive cash flow) of $ 7,152.  Additional benefits can be considered, such as interest expense, that demonstrate the value of combining a lease with the section 179 deduction.

Summary

The net here is that combining a capital lease with a section 179 deduction could help a company manage cash flow and pay lower taxes.  A company should consult with their tax advisor to determine how best to use leasing to take advantage of the section 179 deduction for 2008.

Lease Savings Example

As an example

Consider the following….

• Purchase equipment for $300,000
• 5 Year Capital Lease
• Tax Rate: 30%
• Special Depreciation Allowance – additional deduction of 50% of  property’s depreciable basis

LEASE:

*  Cost of Equipment                            $300,000

*  Section 179

*  Deduction – Benefit              $250,000

    50% bonus Depreciation                   $  25,000

*  Deduction (On any remaining

    amount above $250,000)

*  Total 1^st Year Depreciation               $275,000

    deduction

*  Tax Saving – Benefit             $  82,000

    (total 1^st years deduction x 30%)

*  1^st Year Lease Payment – Cost         $  75,000

*  First Year After Tax Lease               $    7,152

    Benefit (Tax saving – 1^st year

    Lease payment)

2008 Deduction…..

For 2008 tax year, maximum section 179 expense deduction is $ 250,000

This entry was posted on Thursday, July 10th, 2008 at 7:01 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.