Section 179 is a tax code designed to help small and large businesses purchase machinery. It allows businesses to deduct the full amount of equipment purchased, leased, or financed, up to a certain amount. The deduction limit for 2020 is capped at $1,040,000, thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which was passed by the House and the Senate and signed into law on December 18, 2015. Learn more about Section 179 spending caps, bonuses, and more on Section179.org.
Section179.org also does a nice job explaining the tax code’s benefits:
- Section 179 is a tax code created to help businesses. By allowing businesses to deduct the full amount of the purchase price of equipment (up to certain limits), Section 179 is a fantastic incentive for businesses to purchase, finance, or lease equipment this year.
- Section 179 can greatly help your bottom line. By deducting the full cost, you can lower the amount you pay for equipment and/or software substantially.
- Section 179 is simple to use. All you need to do is buy (or lease) the equipment and use a special IRS form. That’s it.
- Section 179 enhancements typically expire at year’s end. The various Stimulus Acts over the past few years have included special provisions for Section 179 and Bonus Depreciation and greatly increased the limits on how much businesses could deduct.
In short, Section 179 is a huge incentive for businesses to keep up with state-of-the-art machinery technology. But it’s a use-it-or-lose-it” proposition, meaning you only have until December 31, 2020, to take full advantage of Section 179.
Buying vs. Leasing Equipment
Section 179 applies when you are buying or leasing equipment. So which is better? To buy or to lease? Let’s take a look at what’s involved in leasing capital equipment.
Leasing with a $1 buyout can be a good option when purchasing capital equipment. A $1 buyout lease is simply a lease where the company (or person borrowing the machinery) makes monthly payments on a piece of machinery. At the completion of the lease, the company “buys” the equipment for $1. This type of lease has many benefits, including keeping your credit line intact, tax benefits, and leveraging your investment dollars.
Let’s Do the Math
Let’s take a look at a $100,000 investment in capital equipment. The lease payment on this would be approximately $2,000 per month. With section 179, the full amount can be deducted from taxes, and assuming a 35% tax bracket, this would result in a $35,000 savings effectively reducing the equipment cost to $65,000.
For example, say you’re looking to purchase an optimizing saw. The saw will increase productivity three-fold and it will also increase material yield by 12%. If you’re running 1,000 feet per day of material at $2.50 per foot, you’re spending $2,500 per day on material.
Using a TigerStop optimizing saw gives you a 12% increase in yield, resulting in a $300.00 per day savings …
… or $6,000.00 per month.
If you pay cash for this equipment, it will take over 16 months to return your investment. By leasing, you’ll see $4,000 added to the bottom line in the first month and every month thereafter ($6,000 per month savings – $2,000 lease payment = $4,000 monthly savings).
This only takes into account material yield savings and doesn’t account for other machinery benefits, such as saved labor time, productivity gains, saved setup time, and reduced scrap waste. Additionally, this material yield savings is on top of the added tax benefits.
Take advantage of Section 179, and see what kinds of purchasing and leasing options are available for your organization. Learn how to recuperate every opportunity to gain a competitive advantage today!