The fourth quarter is the perfect time to begin planning for the coming year. In addition to profits, losses and sales projections, business owners should consider acquiring new or updated equipment before the end of the year to take advantage of legislation that both expands deductions and extends depreciation benefits for qualifying equipment purchases. In fact, tax benefits make the fourth quarter of the year a really good time for businesses to finance new or new to you equipment.
Equipment financing enables your business to conserve cash and lines of credit while providing maximum flexibility, and entering into a finance agreement at the end of the year is also a smart way for companies to use any remaining capital budget while preparing for the new year.
Consider this when determining whether investing in equipment during the fourth quarter of the year.
The IRS Code Section 179 is an incentive created to encourage businesses to invest in equipment. It covers accelerated write-offs for equipment purchases and is beneficial to smaller businesses with limited budgets.
Effective Jan. 1, 2016, businesses purchasing $2 million or less in capital equipment can deduct up to $500,000 of that expense immediately on their 2016 tax return. Financing can further enhance the bottom line by eliminating the upfront cash outlay typical of an equipment purchase while still preserving the Section 179 deduction. However, equipment must be financed and in place by midnight Dec. 31, 2016, in order to qualify for the 2016 tax year.
Bonus depreciation, under the same legislation for 2016, businesses of all sizes can depreciate 50 percent of the cost to acquire eligible equipment on their 2016 tax returns. This tax break has been extended through 2019, although it will phase down to 40 percent in 2018 and 30 percent in 2019.
For many businesses, asset depreciation plays an important role in fiscal management. Most equipment acquisitions offer depreciation benefits, but determining whether a company can effectively use all of that depreciation may require you accountants assistance.
This is especially true for equipment-intensive businesses. Taxpayers in need of the sheltering effect of equipment depreciation will typically benefit from tax ownership of equipment. This can be accomplished with a loan, installment payment agreement and some leases. All of these options allow the user to deduct depreciation and interest charges from taxable income.
Companies with a more complex tax situation may want to consider a tax lease. Tax leases effectively trade tax depreciation for lower payments. Plus, tax leases allow the entire lease payment to be deducted as an operating expense.
Leasing, allows a company the freedom to obtain the equipment it needs when it is needed.
There are many reasons to finance equipment at any time of the year, but companies interested in taking advantage of expanded tax benefits for 2016 and getting a head start on next year should consider financing new or updated equipment before Dec. 31. It may be the best decision you make all year.