Businesses often overlook utilizing the Section 179 deduction as a benefit of equipment financing in the form of tax savings. But what is this deduction, exactly? Section 179 of the Internal Revenue Code is a tax law designed to help and encourage business owners like you to invest in equipment and technology. Section 179 allows you to deduct the full price of qualifying equipment purchased or financed during the tax year up to $1 million from your gross income in 2019. Section 179 gives you a choice: apply full depreciation for the equipment purchased in the first year, or spread it out over the depreciable life of the asset.
Consider the following example: One LendSpark client, a manufacturing company, purchased a piece of new equipment for $50,000. The equipment had a useful lifespan of five years. Using Section 179 (instead of straight-line depreciation), the company can deduct the entire expense in the first year. The calculator on Section179.org, gives an example of potential savings using Section 179 to purchase new equipment in 2019.
Please note that this Section 179 Calculator fully reflects the current Section 179 limits and any and all amendments/bonus depreciation.
If your business purchases, finances or leases less than $2.5 million in new or used equipment during the 2019 tax year then you may qualify for Section 179. Using this deduction can help you expand your fleet, upgrade equipment, and obtain new and improved technology. Now is the time to prepare to take advantage of this tax credit in 2019. If you have exceeded the limit for this year, it’s time to start creating an equipment financing plan for 2020.
Here’s an example using the scenario if you purchased $500,000 in equipment for your business in 2019.
Taking advantage of Section 179 sounds pretty simple. However, there are a few things to consider when deciding if this deduction is right for your business.
DOES SECTION 179 EQUAL PROFIT?
Section 179 applies to outright purchases as well as leased and financed equipment. Payments are typically spread out over time when leasing or financing equipment. With Section 179, you could choose to deduct the full cost of the equipment in one year. The amount you could save in taxes may be more than the cost of financing. This strategy makes Section 179 a powerful deduction that benefits your bottom line.
In many cases, this deduction will actually be a “profit.” This is due to the fact that the amount you deduct will almost always exceed your cash outlay for the year. All this requires is the combination of a properly structured equipment lease or equipment finance agreement with a full Section 179 deduction.
TIME ACTUALLY MATTERS
When the marketing emails and flyers urge you to act quickly, they are serious. To qualify for Section 179 in 2019, equipment must be purchased and put into service before December 31, 2019. So not only do you need to have purchased the equipment, but it must also be in service. For equipment that requires installation, commissioning, and/or training, this means scheduling training now for your employees in order to be in compliance with the law. Other businesses in your field will be taking up spots quickly in training sessions, so acting quickly is to your benefit if you want to get your employees properly trained.
HIDDEN COSTS TO CONSIDER WITH PURCHASING EQUIPMENT
When investing in technology, be aware of hidden costs. Additional training or implementation costs can be hiding in the details, and they may or may not be included in the cost of the equipment. If training is not included in the financing package, it cannot be included in your Section 179 deduction. Not only would you have to pay separately for training, you could also lose out on the opportunity for a larger deduction.
Another hidden cost is the potential modification to your existing office to accommodate your new equipment. Installing new electrics and water lines, etc. to power your purchase are costs that you may not have considered and which do not qualify under Section 179. It is important to consider these costs against the savings that the Section 179 deduction will net your business.
We tend to think of hard costs–dollars and cents spent–without considering soft costs or opportunity costs. Soft costs include stress and time, such as the stress to your staff or time lost when dealing with overly complicated equipment. It is important to think carefully about these “soft costs” and whether the new technology will truly improve your bottom line or productivity. It is all about working smarter, not harder.
These soft costs, or opportunity costs, should ultimately be viewed as lost revenue. If you wait to implement a technology that helps you offer a new service or attract new customers, you are losing out on revenue you could have captured if you had acted sooner. Planning for these soft costs and making a timeline for implementation instead of rushing can help you maximize both your Section 179 benefit and minimize the impact of training and implementation of new technology.
TIME VALUE OF MONEY & INTEREST RATES
The idea of “time value of money” is defined as ‘a dollar is worth more in the future than it is today’. This is true because you can make money by investing that dollar. So if you were to invest with an interest rate of 10%, one dollar invested today will be worth $1.65 in five years. Compare this to the average interest rates of money market accounts. Many money market accounts bear less than 1% interest rate. This means that investing that one dollar may only be worth $1.04 in five years. That is not a very attractive profit.
The Federal Reserve has kept interest rates low for precisely this reason. It is more attractive to invest that dollar in technology to grow your business than it is to put that dollar in the bank. The key to this is ensuring the technology you spend your money on will provide a return, aka Return on Investment (ROI).
Section 179 is a “use it or lose it” deduction that ends December 31, 2019. If the technology you purchase today with your one dollar generates more than five cents in profit over the next five years, your ROI will be higher than if you had left your dollar in the bank. In this scenario, purchasing the technology and utilizing Section 179 would provide a larger ROI than letting your money just sit in the bank.
IS TECHNOLOGY TRULY AN INVESTMENT?
Many capital equipment items qualify for Section 179, from computers to lasers to CAD/CAM. However, not all capital equipment items that qualify are actually investments. An investment is defined as something you purchase that is expected to produce income. If the technology brings a new revenue stream, such as offering a new product or service, then it is considered an investment. If it does not meet this definition, then it is simply a purchase.
It may be worthwhile to take a second look at those Section 179 advertised specials and consider if this may be an opportunity for you to utilize in your business. You might just be able to offset the cost of an investment in technology or equipment to benefit your business. As with any tax issue, be sure to consult a professional tax advisor for guidance. They may know of other advantageous provisions of Section 179 that could apply to your particular situation.
LendSpark has a demonstrated history of working with a variety of businesses to obtain equipment financing and snag these Section 179 savings. Apply today to see if we can help you invest in your business and save tax dollars in 2019.