The year’s best decision
These days, businesses of all types – from healthcare to manufacturing to technology – are holding on to cash more tightly than ever before, taking a “wait and see” approach to the economy. As a result, many businesses are getting by with outdated equipment that isn’t as efficient as it used to be or, worse yet, spends more time being repaired than it does running.
That said, most businesses do not allow for unused budget dollars to be carried over to the following year. This can put many companies in the position of having to spend money before year-end, which can impact how the equipment is treated from an accounting perspective.
While there are many benefits to leasing capital equipment throughout the year, specific economic stimulus programs and tax benefits make leasing during the fourth quarter especially advantageous. Colorado companies planning to invest in new equipment in 2011 should consider the following end-of-year equipment financing benefits:
Attractive rates. During the fourth quarter of the year, equipment finance companies can take advantage of specific tax rules that enable them to pass along lower rates than they can during the first nine months of the year. Companies leasing capital equipment will find leases most attractively priced during October, November and December.
IRS Code Section 179. IRS Code Section 179 is a temporary tax break available through the economic stimulus package. Section 179 provides accelerated write-offs for capital expenses that are particularly attractive to businesses with limited capital expenditure budgets. Under Section 179, businesses purchasing $2 million or less in capital equipment during 2010 can deduct up to $500,000 of that expense immediately on their 2010 tax return.
Companies acquiring more than $2 million in capital equipment during the year will need to manage the tax ownership of those assets in order to maintain a Section 179 write-off. By working with a qualified partner to lease assets over $2,000,000, the lease can be structured so the finance company becomes the tax owner of the equipment, allowing you to maintain your Section 179 deduction on assets below that threshold.
This accelerated write-off is a temporary benefit from the Economic Stimulus Act and expires on December 31, 2011.
Mid-quarter convention. Any company acquiring more than 40% of its assets during the fourth quarter of the year is subject to the “mid-quarter” convention. Generally, mid-quarter convention rules reduce the depreciation available on equipment acquired throughout the year and increases income tax liability.
Using a lease to finance assets acquired during the fourth quarter allows companies to maintain the maximum allowable depreciation on earlier purchases while trading in the tax depreciation on equipment acquired in the fourth quarter for overall lower financing rates. What’s more, most leases allow the user to retain the option to own the equipment at the end of the financing term.
General benefits. At any time of the year, leasing capital equipment provides many benefits for companies keeping a close eye on the bottom line. Leasing is a great way for companies of all types and sizes to acquire the equipment to remain competitive while conserving cash. Some lease programs require as little as no money down.
With leasing, adding or upgrading equipment is easy, which protects companies from being stuck with outdated equipment. This is particularly important in the rapidly evolving world of technology and medical diagnostics.
For certain leases, lease payments can be structured to match cash-flow, which often means the increased revenue generated from the new equipment covers the cost of the monthly lease payment. Additionally, soft costs such as installation, service and support can often be rolled into the lease, allowing companies to make one, predictable monthly payment for both equipment and services.
Leasing is a viable alternative to purchasing equipment at any time of the year, but companies interested in getting a head start on the competition for 2011 should consider the specific tax and stimulus benefits of leasing during the fourth quarter. It just might be the best decision you make all year.