Financing Foundations

Lease financing is used by a majority of businesses in the U.S. and accounts for about one-third of new equipment acquisitions, so it’s probably something worth considering for your next project. At a minimum, lease financing is something that every small business owner should understand.

Advantages of Financing

As a financing solution for small business, leasing offers a number of significant benefits:             

Conserve Working Capital

Typically, a lease offers 100% financing for the cost of the equipment (including costs related to shipping, delivery, and/or installation) with no down payment requirement. Particularly for an early stage business, the ability to conserve cash to cover operating and other business expenses is hugely valuable. Additionally, you retain the option to deploy your capital elsewhere or to take advantage of future business opportunities that may not be present today. 

Cash Flow Management

Convert large up-front capital investments into a manageable stream of payments. Lock-in a fixed payment schedule that results in outright ownership of the equipment. Use your new equipment and facilities to generate revenue while you pay for it. 

More Flexible Financing Solutions

Leases can provide more flexibility than other forms of financing because the lease agreement can be negotiated to better suit the circumstances of each party. For example, the payment schedule can be negotiated to include escalating payment amounts to better suit cash flow prospects of a start-up business.

Tax Reporting Advantages

In the U.S., a finance lease allows the lessee to treat the lease as an ownership position for tax purposes. This allows the lessee to deduct depreciation expense (a non-cash expense) as well as interest expense (a component of the lessee’s schedule lease payment) for tax purposes. A finance lease also allows the lessee to take advantage of the Section 179 Deduction, which can significantly lower the effective cost of your equipment purchase.**

**You should always consult with your qualified accountant when it comes to your specific business tax deductions. Additional information on business taxes and Section 179 can be found at www.irs.gov.

 

Why Section 179 is Important to You

Section 179 of the IRS tax code is a provision that allows business owners to lower the effective purchase price of new equipment by providing a tax deduction equal to the full amount of the purchase price. Under a finance lease or capital lease structure, leased equipment cost can also be utilized for the Section 179 deduction as if it was purchased outright.   

 

What is Section 179?

Section 179 of the IRS tax code allows a business to deduct the full purchase price of purchased or leased equipment for the current tax year from its net taxable business income.  The equipment must qualify for the deduction and be placed into service during the same tax year that the deduction is being taken.  This incentive was created by the United States Government to encourage businesses to invest in new equipment and in their own business’ growth. 

 

Leasing and Section 179

Equipment financed through a lease has to be structured under a finance lease or capital lease in order for it to qualify for the deduction. Some businesses may be surprised to find that the lease payments made the first year will actually be less than the tax benefit created through the Section 179 deduction.
 

How Does It Work?

Instead of writing off the equipment through depreciation over the course of a few years, business owners have the opportunity to write off the entire equipment purchase price up front, at one time.  This is especially beneficial for those businesses who are leasing the equipment as they did not even have to incur the initial capital outlay to qualify for a sizable deduction. 
 

Taxable Income Limit

The Section 179 deduction amount is limited to the total amount of taxable income of the business - once applied, the Section 179 deduction cannot create an overall taxable loss.  Any amounts disallowed by the taxable income limit are carried over to the next year (or any year in the future) and are added to the cost of property purchased and placed in service that year.  The same applies if your business has an overall net loss for the year, the Section 179 deduction cannot be applied and the deduction amounts are carried over and applied in future years.

 

Section 179 Tax Deduction Limit (2016)

• Maximum Deduction Limit: $500,000

**You should always consult with your qualified accountant when it comes to your specific business tax deductions. Additional information on business taxes and Section 179 can be found at www.irs.gov.