If you've been thinking about a business equipment purchase, now is arguably the smartest time to do so. There are two HUGE reasons to expedite purchasing this year:
- Minimize cash out of pocket. Lock in today's pricing and payments for considerable savings.
- Accelerate tax savings. Don't miss out on your window to save!
Let's dive in a little further to explore each method of saving, how to set up financing to get the most bang for your buck, and how much you could save come tax time.
// Minimize Cash Out of Pocket //
It's no secret that 2022 has brought with it historic inflation rates. To help mitigate the rapid rise in inflation, the cost to borrow money has risen. This economy has made it tougher for small businesses to justify (or feel comfortable) making large purchases. There are two ways for you to save those hard-earned dollars:
Lock in today's pricing
Prices are expected to continue their rise with inflation, cost of transport, and demand. The new year is also when many manufacturers raise retail pricing. By making a purchase before year-end, you may be able to save a good chunk of change.
Lock in today's payments
Lenders (like Geneva Capital) have great options for deferred or reduced payments. Many times, you won't have to make a significant investment until your equipment is in-house and generating revenue! (And your regular payment amount won't fluctuate with the Fed...it'll remain consistent throughout the length of your term.) Here is our current finance offer, but remember...we can always tailor a payment plan to fit your unique needs.
// Accelerate Tax Savings //
You may not be thinking about year-end tax planning yet. However, with ongoing supply chain issues, it's crucial to start thinking about equipment acquisitions now. By planning ahead, you'll be in good position to maximize potential tax savings...specifically via Section 179 accelerated depreciation.
With Section 179, you may be able to deduct the entire amount you paid for an item this year instead of depreciating it over several years.
Check it out:
Internal Revenue Code Section 179 generally allows companies to deduct the full cost of certain equipment in the year it's placed in service. This results in immediate tax savings for the business.
Stick with me through this calculation: A machine shop purchases a $50,000 CNC machine this year and elects to deduct the full amount via Section 179. Assuming a 30% marginal tax rate (federal + state), the company will reduce its income tax by $15,000 ($50,000 x 30%) in the year the equipment was purchased and put to use.
Therefore, the net cost to the company is only $35,000 ($50,000 - $15,000 savings)!*
The cool part is that a business doesn't need to pay cash for the equipment to take advantage of Section 179! The machine shop in the example above could finance the purchase of the CNC machine via capital lease or loan and still take the deduction.
They'd get new equipment to grow their business along with:
// Little initial investment
// Payments spread over years
// Immediate tax savings
The kicker is that equipment must be purchased and put into use by December 31 to qualify for the deduction. If you're planning to take advantage of Section 179 this year, make sure to start the acquisition process soon! With ongoing supply chain issues, it can often take several months for equipment to deliver and install.
Note: There are some limitations on Section 179 to be aware of. We've listed a few at the bottom of this article.
How do I set up financing to take advantage of Section 179?
We can structure financing as a Capital Lease (e.g. $1 purchase option) or as an Equipment Finance Agreement (EFA) in order to qualify for the Section 179 deduction. Talk to one of our sales representatives to discuss which option works best for you.
Tip: Keep in mind that everyone's tax situation is unique. We can lay some options out for you, but it's important to discuss topics like Section 179 with your tax advisor prior to making any final decisions.
How much could I save with Section 179?
That depends on a few factors, but this savings calculator can give you a good idea!
*All examples are for illustrative purposes only and may vary. Please consult your tax advisor.
**Section 179 limitations:
- Section 179 was designed for small businesses, not large companies. The maximum deduction for 2022 is $1,080,000 (and starts to be phased out once total equipment purchases for the year exceed $2.7 million).
- Section 179 cannot be used to generate a loss for the business. If a company's taxable income before the deduction is minimal, it may want to limit the amount of the Section 179 election. In this case, the company is probably in a low tax bracket, limiting the value of the deduction. Taking ordinary depreciation over the useful life of the equipment may be a better alternative.
- Some states limit the amount of the Section 179 deduction for state income tax purposes. It's important to know your state's rules before estimating the overall tax savings resulting from the Section 179 election.