Section179 and Financing Equipment – Win WIN

Section179 and Financing Equipment – Win WIN

The Section 179 deduction can be a powerful tool for businesses looking to save on taxes. This IRS tax code allows businesses to deduct the full purchase price of qualifying equipment – up to $1,040,000 in 2021/2022 – and it’s only getting better.  

The new rules allow taxpayers to claim the Section 179 deduction on everything from off-the-shelf computer software and certain types of improvements made to nonresidential real property – like workshops and office space – and of course on capital equipment.  

That means small business owners can take advantage of even more savings whether you’re leasing or purchasing equipment.  

Features of Section 179 for Businesses

The Section 179 deduction is especially beneficial for businesses that prefer to lease rather than buy equipment, as leasing allows them to avoid large upfront costs and spread the expense of equipment out over a longer period of time.  

In addition to Section 179, businesses may also take advantage of bonus depreciation when leasing equipment.  

Bonus depreciation allows businesses to deduct an additional 50% of eligible business assets in the first year they are placed in service. This means that qualified businesses can write off up to 90% of their total eligible costs within the first 12 months, providing even more potential tax savings.  

But as with everything you read about tax savings, check with your accountant to find out what applies to you and your specific situation. 

Here’s how IRS 179 and related tax codes can offset the cost of new equipment for many Adia Capital clients… 

Simple Math and Section 179

Here’s how the math on equipment purchases work. In the example below you’re buying a new piece of machinery for your business for $30,000. 

You will make the purchase outright or Adia Capital will help you arrange leasing or traditional financing for the full amount.  

When you do your taxes for the year you’ll take that entire $30K as a deduction off of your top line. So if you your net income was $100K after your regular deductions you can take an additional THIRTY THOUSAND DOLLARS, or whatever your purchase price was, off of that amount.  

This is the form you or your accountant will use for that IRS Form 4562. 

So now you’re only paying income taxes on $70,000 instead of $100,000.  

At a 21% tax rate you save $30,000 x .21 = $6,300 

If you are in a higher tax bracket you may save even MORE. 

Of course, there are even more advantages her when you combine this savings with equipment leasing or financing… 

Equipment Financing Advantages

When you’re evaluating a new equipment purchase, there are many reasons to finance instead of paying cash outright, such as:  

In particular though, when you finance equipment you still get the Section 179 deduction. So in the example above you get to save $6,300 in taxes EVEN THOUGH YOU’RE PAYING THAT $30K OVER TIME. 

It’s like the federal government is subsidizing your growth to the tune of about $525/month that first year.  

Why Finance equipment if you have the cash? 

Before you even get to the bullet points above, you should really examine the fundamental advantage of using OPM (other people’s money).  

Leasing or financing equipment with other people’s money can be a smart decision for businesses, even if you have the cash to purchase it outright.  

By utilizing capital from an outside source, you’re able to maintain their liquidity and use cash on hand to invest in other aspects of your operations like hiring new staff, marketing efforts, or inventory purchases.  

This allows you to allocate funds more effectively and get greater returns than if you had used all available cash on one large asset purchase. 

Cash Purchase vs. Equipment Financing Example

Let’s say you’re in the Custom T-Shirt business and want to grow by adding commercial embroidery. That way you can offer custom embroidered hats and polos to current customers and bring in new ones looking specifically for embroidery.  

You budget $30,000 for your equipment purchase – and that might get you a group of 3 15 need machines or 1 multi-head embroidery machine to help with larger orders.  

OPTION 1 – Paying Cash for a new Embroidery machine

You have $40,000 saved up in your business account to cover new purchases, emergencies, and sales and marketing efforts. So you spend that $30K on new equipment and are left with $10,000.

Your new embroidery business is profitable, but won't start really making big bucks for 90-120 days while you build your clientele.

In that 3 months maybe your screen print or direct to garment printer goes down and you need repairs, you have a slow month, get sick and need to take time off... or inflation, delivery delays, etc. cause you to burn through that remaining bank balance.

After all, it's now only $10,000.

BUT, when you DO start selling those embroidered goods you're doing on equipment you OWN. So there's no debt attached and you get to keep more of the profits.

Of course, you'll need to replenish that $30,000 spent with those profits so it may be 12-18 months before you actually start netting new money in your business account.

Option 1:

$30,000 Investment
$15 GP per Unit
2,000 units until payoff
18 Month ROI

OPTION 2 – Financing an Embroidery machine

In this same basic scenario, let's examine what happens if you lease a new embroidery machine or 3, spending that same $30,000.

If you have good credit, there's a good chance you'll be able to finance or lease for 5 years with no money down. That means that you may be able to learn how to use and start making money on your new equipment BEFORE you have to make your first payment.

The payment can vary widely depending on many factors, but we'll use a $700/month payment as an example here. From our experience in the industry, we know that most embroidery shops make between $12-$20 per polo or custom cap. Simple math tells us you'll break even on your lease payment at about 50 units per month.

You’re new embroidery machines will probably be profitable in Month 1. With Option 1, you would have to sell over 2,000 units to make up that $30,000 you spent.

So how long would it take your machines to be profitable then?

The difference between Cash and Leasing is when you pay outright, you start making money at shirt or cap #2,001. If you lease, you start at #51.

Option 2:

$700/month payment
$15 GP per Unit
50 units until cash flow

Section 179 + Financing for the BIG Win

Let’s just reiterate the benefits of leasing equipment when you combine it with Section 179 tax breaks: 

Do more, make more, save more and GROW more!  

In order to qualify for this tax break your new equipment must “go into service” in the calendar year you’re taking the deduction. So get moving and contact us!