Benefits of a Non-Tax/Capital Lease
Business owners who buy capital equipment - machinery, computers, and other tangible goods, usually prefer to deduct the cost in a single tax year, rather than a little at a time over a number of years.The benefit of a Non-Tax or Capital Leases is that they can take advantage of Section
179 and expense up to the amount allowed for the year the equipment is installed. You may depreciate any excess on the depreciation schedule for that particular asset. Examples of this type of lease include $1.00 Buyout and 10% Purchase Upon Termination (PUT) leases. Since tax situations differ, please consult a tax advisor about the specific benefits on your business.
Tax Code Section 179 & Election to Expense
An expense deduction is provided for taxpayers (other than estates, trusts or certain noncorporate lessors) who elect to treat the cost of qualifying property, called Section 179 property, as an expense rather than a capital expenditure. Under tax code Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by December 31st. Non-Tax leases qualify for this deduction in the year of inception. Any excess above the expensed amount can be depreciated depending on the equipment. The election, which is made on Form 4562, is for the tax year the property was placed in service or an amended return filed within the time prescribed
by law. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. Section 179 property is property that you acquire by purchase for use in the active conduct of your busuiness. To ensure property qualifies, reference Publication 946.
Under Section 179, businesses that spend less than $430,000 a year on equipment or property can write off up to $108,000 in 2009. Dollar amounts may increase, being adjusted for inflation. The rules are designed for small businesses so the $108,000 deduction begins to phase out companies that purchase more than $430,000 in a year. Companies cannot write off more than their taxable income. For greater, contact your tax advisor or visit www.irs.gov and reference Form 4562.
Benefits of a Tax Lease/True Lease
This lease type is where the lessor retains ownership and as the lessee, may be allowed to claim the entire amount of the monthly investment as a tax deduction. Many rental contracts qualify as a true lease including a 10% Option and a Fair Market Value lease. Example: Monthly investment is $ 1,000, term is 36 months. Assuming a 35% tax bracket, the monthly tax savings would be: $1,000 x .35 = $350.00. Total tax savings over the term of the contract would be $12,600.00.