With the ever-rising costs of fuel, fertilizer, seed and labor, this year might seem like the worst time to consider a new harvester or tractor. However, thanks to the 2008 U.S. Tax Code Section 179 expense allowance rules, there might never be a better time to lease the equipment you need.
Created by the Economic Stimulus Act of 2008, Section 179 is a capital spending incentive for small businesses—and it can profoundly and positively impact your business. The new rules present a once-in-a- lifetime opportunity to upgrade existing equipment--but time is running out. Some Section 179 rules, including new bonus depreciation limits, are set to expire on December 31, 2008.
Any time that you acquire new equipment it would be ideal to deduct the entire cost in that tax year--especially if you could lease the equipment late in the year and still take the full amount of depreciation. The 2008 Section 179 rules allow you to do just that. (see Case Studies below) Assuming the equipment is put into use prior to the end of the year, you can deduct the full amount of equipment purchases from your taxable income up to the approved limit for a given year (now almost doubled to $250,000 for 2008).
In addition, depending on the equipment and specific scenario of your business, any excess equipment cost above the amount expensed under Section 179 can be depreciated. And again, 2008 incentive changes allow for “bonus” depreciation of a full 50 percent for the first year.1 Generally, excess depreciation only applies to new equipment purchased.
There are, however, some limits – the total cost of property that may be expensed cannot exceed the total amount of taxable income during the tax year.
A capital lease provides the means of obtaining financing for new equipment at competitive rates without compromising your available bank credit line or operating loan. Capital leases typically run from 36 to 72 months, depending on the purchase amount, the leasing company’s credit criteria, and their internal policies, and are most often created with a $1.00 buy-out at the end of the lease term. As the lessee, you are eligible to take full depreciation and expensing on the equipment, as shown in the following examples:
Stillwater Leasing, Inc. does not provide legal or tax advice. Please consult your tax or legal advisor regarding your individual situation.
1 Not all states recognize federal tax rule changes. Consult your local tax advisor for state-specific details.
