What could be better than making a smart investment and having it be cash flow positive even faster?
When it comes to owning a small business, there are several tax deductions one may encounter. If a company is starting ground up or focused on continued overall growth, it is important to be educated on this tax code and similar, as well as understand what tax regulations mean and what they can determine for your company.
Section 179 is “a tax incentive that allows small businesses to write off the entire purchase price of qualifying equipment in the year it was purchased. If a business bought a piece of equipment before Section 179, they would have had to write it off over its normal recovery period.” It may be possible that 100% of the equipment cost can be deducted from a taxable income in the same year it’s purchased.
As this code applies to equipment, the equipment options will vary per company. Equipment should be physical – such as furniture, or mechanical – such as machinery. As long as it is tangible, it can be deducted. With Section 179, eligible businesses are able to deduct the cost of any qualified purchase. Although, this equipment can only be deducted if it was purchased within the tax year. There is a limit to how much a company can deduct as per income and owner.
As 2020 comes to an end and 2021 arrives, businesses should be well aware of what this tax code is. For companies that are going to make a profit this year, they can seize the opportunity to still invest in equipment before January and write off the entire amount, as opposed to depreciating over three, five, or seven years. In order to do so, they must speak with their tax advisors to properly determine the value of savings and to ensure they’re taking the right steps to leverage Section 179 properly.
The code can also apply to equipment leased or financed, not only bought outright. Leasing equipment may be more attractive and provide additional benefits. Benefits include preserving your cash flow, maintaining/developing credit, increasing flexibility, customized financing, and easy approval. Most importantly, this enables a small business to gain quick access to the Section 179 code and generate positive cash flow.
The best way to understand how this all works is with a juicer example:
Let’s say a customer buys a $5,500 juicer and decides to lease it at $121 per month for a 5-year lease. The transaction is in November; therefore, they have to make their first payment in December for $121. If we assume a 35% tax rate and the company was profitable in 2020, then 35% of $5,500 would be a $1,925 increased refund for 2020, which would be payable in March or April. For 2020, a company has spent $121 cash out for this juicer (December payment) but generated $1,925 in tax benefit for the year 2020. In addition, there is also the positive revenue, cash flow, and image boost from the juicing business. If this company is going to lease equipment, their transaction will be a cash positive one once they receive their tax refund.
Section 179 can be used every year and with having a strong understanding of it, any company can effectively make and save money. A professional tax advisor should support any specific calculations. To better help you, use this calculator to determine how much money you can save in 2020.