The Clock Is Ticking …
It’s Kind Of A Big Deal
If your business leased equipment between January 1st to December 31st and uses it before the end of 2022, you can deduct 100% of the equipment costs. It’s not too late to take advantage of this tax break.
Better Sooner Than Later
As this year is quickly coming to a close, now is the time to take advantage of the Section 179 deduction. In 2022, the deduction limit for businesses increased $30,000 from 2021. This specific tax code may assist you in saving on taxes while preserving your cash flow. Small business owners may reduce tax liability when choosing IRS Code Section 179 to replace the normal depreciation write-off process.
Unlike normal depreciation, Section 179 allows your business to write-off 100% of the purchase price (up to $1,080,000) of the equipment you finance. If you lease business equipment, you are eligible to subtract the entire price from your gross income in the same tax year. This helps boost the cash flow of small and medium-sized businesses. It may sound too good to be true, but it’s real. Keep your money for other expenses (like payroll and consumables) when you lease new or used equipment.
Key Take Aways
- $1,080,000 deduction limit (NEW!)
- $2,620,000 spending cap
- Deduction stops after $3,670,000
- Bonus depreciation is 100%
- In order to take advantage of the tax break in 2023, you must purchase and use the equipment in 2022 – the clock is ticking
- This deduction is focused on small and medium-size businesses
- Used for new or used property that is leased by your business – not for property that is received as a gift or inheritance.
- Cannot be used to deduct the purchases of other types of property, such as land, permanent structures attached to land, inventory and property used outside the United States.
Made For Small Business
The IRS tax code Section 179 deduction is a way to reduce the total cost of new equipment and machinery by enabling the buyer to claim full depreciation in year one. This deduction, also known as first-year expensing, is a write-off for equipment in the year you purchased and placed it into service. This tax break is intended to make it more affordable for small companies to buy business equipment, such as office furniture, vehicles, computers, machinery and other tangible capital investments, by allowing businesses to deduct up to $1 million per year in qualifying business equipment purchases from their taxable income.
In order to take advantage of the tax break in 2023, you must purchase and use the equipment in 2022. Whether you’re buying items for the first time or upgrading to new and more efficient equipment, the clock is ticking.
Types of qualified business purchases may include:
- Tangible personal property used in business
- Business Vehicles with a gross vehicle weight in excess of 6,000 lbs
- Computer Software (off the shelf, not custom)
- Office Furniture
- Office Equipment
- Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)
- Certain improvements to existing non-residential buildings: fire suppression, alarms and security systems, HVAC, and roofing
- Property must be used more than 50% of the time by the business to qualify for the deduction
2022 DEDUCTION LIMIT = $1,080,000
To use the deduction in tax year 2022, the property must be financed and put into service by end-of-day on December 31, 2022.
BONUS DEPRECIATION = 100% FOR 2022
Bonus Depreciation is in addition to Section 179. The amount varies from year to year, but in 2022 it is one hundred percent. That means equipment costing more than $1,080,000 can still get the full deduction.
2022 SPENDING CAP ON PURCHASES = $2,700,000
Spend up to $2,700,000 on equipment. Beyond that, the Section 179 Deduction starts to decline — dollar for dollar. This cap defines Section 179 as a small business tax incentive. Larger businesses that spend more than $3.7 million on equipment won’t get the tax break.
|New/Used Equipment Purchase:||$1,780,000|
|First Year Write Off:||$1,080,000|
|($1,080,000 = maximum in 2022)|
|100% Bonus First Year Depreciation:||$ 700,000|
|($1,780,000 – $1,080,000. 100% is New in 2022)|
|Normal First Year Depreciation:||$0|
|(20% in each of 5 years on remaining amount)|
|Total First Year Deduction:||$1,780,000|
|($1,080,000 + $ 700,000 + $ 0)|
|Cash Savings:||$ 623,000|
|($1,780,000 x 35% tax rate)|
|Equipment Cost After Tax:||$1,157,000|
|(assuming a 35% tax bracket. $1,780,000 – $623,000)|
IRS Form 4797
Did you purchase equipment used for business purposes in 2022? If yes, you will need to fill out IRS Form 4797: Sales of Business Property. The purpose of IRS Form 4797 is to report any financial gains from your transaction to the IRS. Get the form here.
Benefits of Leasing
- Maximize your cash flow
- Keep more cash & lines of credit open for future growth
- Better manage your monthly equipment expenses
- Tax benefit is 100% of equipment costs
The amount you save in taxes may in fact exceed the payments which makes this very attractive to the bottom line.
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