Section 179 – Maximizing the Bang for Your Equipment Buck
The fourth quarter is an excellent time to finalize equipment purchases. Based upon year-to-date (YTD) financial results, management can get a pretty good idea if investment in equipment or software is in the cards, so to speak. It is also a very good time to study YTD production efficiency results and to determine if new equipment purchases could move these statistics in the right direction. Moreover, as the selling season winds down in late December, it becomes an excellent time to install new equipment or software with minimal disruption on the production floor. But there is another very valuable reason to wrap up those equipment or software purchasing decisions as soon as possible. It is called the section 179 tax deduction.
This year, section 179 tax deduction has been enhanced. It now allows you to deduct the full purchase price of both new and used equipment up to $500,000. In addition, there is a bonus depreciation of 50 percent on the remaining amount above $500,000. So, say you purchase new and used equipment totaling $650,000 … you can take a deduction of $500,000 plus an additional $75,000 deduction (50 percent of the remaining $150,000). This is in addition to your standard first-year depreciation allowance under MACRS rules, which is 14.29 percent for equipment with a seven-year class life (IRC Section 168). So, in this example, the total tax deductions fall just short of $586,000 on your $650,000 in equipment purchases. Now, assuming your company is in a 35 percent tax bracket, this puts your tax savings at $205,000 on your total equipment purchases! The bottom line—your $650,000 in equipment purchases cost you a net of only $445,000!
The bonus depreciation on amounts above $500,000 really becomes a big help when it comes to squeezing the maximum amount of equipment purchases into your budget. Say you are trying to decide on two separate equipment packages—a more economical package totaling $400,000 vs. a premium package priced at $600,000. After you factor in the tax savings due to Section 179 deductions, the $400,000 package ends up costing you a net of $260,000 and the $600,000 package nets out at $405,000. This means you are able to purchase an additional $200,000 in equipment and software for only $145,000.
Now that is what I call maximizing the bang for the buck!