Should You Take the Section 179 Deduction?
If your business is planning to invest in machinery, tools, or heavy equipment, it generally makes sense to take the deduction. You can secure the largest possible tax benefit immediately rather than spreading it over several years, which frees up more cash to reinvest in your business.
For example, if your business tax rate is 35% and you buy $200,000 worth of equipment, using the Section 179 deduction allows you to write off up to 80% of the cost upfront. This results in a tax saving of $56,000 ($160,000 x 35%). Without the Section 179 deduction, you would have to spread the savings over several years, potentially saving only $14,000 in taxes this year.
Another benefit is that using Section 179 simplifies your tax planning. You won’t need to track an asset’s depreciation year after year—just deduct the full cost upfront. In most cases, opting for the Section 179 deduction is a smart financial move.
What About Leased Equipment?
You can also take advantage of the Section 179 deduction when financing equipment through certain types of leases. Whether you qualify depends on the lease type: capital lease or operating lease.
- Capital Lease: In this arrangement, you eventually plan to own the asset by the end of the contract—similar to a rent-to-own deal. Under a capital lease, you can deduct the entire cost of the equipment immediately. For example, you could lease a $90,000 bulldozer over three years with $30,000 in payments per year, but still deduct the full $90,000 up front.
- Operating Lease: If you’re simply renting the equipment with the intention of returning it at the end of the lease, you cannot claim the Section 179 deduction. Instead, you can only deduct your monthly payments, which provides less tax relief.
When Should You Avoid Using Section 179?
If your business is in a low tax bracket this year but expects to owe more in the future, it might be wise to skip the Section 179 deduction and use the traditional depreciation schedule instead. This allows you to claim smaller deductions over time, which could be more beneficial when your tax rate is higher.
Additionally, the Section 179 deduction begins to phase out if your total purchases exceed $2,890,000 in a year, and it completely disappears if you buy over $3,500,000. This cap is designed to ensure that the deduction remains available to smaller businesses.
How Should This Impact Your Decision to Borrow Money?
When considering financing for new equipment, keep the Section 179 deduction in mind. The tax savings from this deduction can significantly offset, or even cancel out, your first-year loan costs. This makes the decision to finance more appealing since the immediate tax benefits can reduce your overall borrowing expenses.
Remember, the cost of not growing your business can sometimes be higher than the cost of expanding. Taking advantage of the Section 179 deduction can help you scale more quickly by maximizing your tax breaks. If you work with a lender experienced in this area, they can ensure that you fully benefit from the deduction when setting up your equipment financing.
The Section 179 deduction was designed to encourage business growth and expansion. Why not take full advantage? Not only will you equip your business with new tools, but you’ll also enjoy a significant tax break on your next return. It’s a win-win situation.
Don’t Miss Out on the Section 179 Deduction!
Nick Noah