Tax Deductible Payments
Depreciation up to 50 percent
Jobs and Growth Tax Relief Reconciliation Act of 2013;
The Jobs and Growth Tax Relief Reconciliation Act of 2013 (P. L. 108-27) increases the first-year additional depreciation allowance from 30 percent to 50 percent. The 50 percent rate applies to property acquired after December 31st, 2012, and placed in service before December 31, 2012.
Bonus depreciation is available only for new property. This restriction is for property initially purchased for personal use and then converted by the taxpayer for use in the taxpayers trade or business. New property acquired by a taxpayer for personal use and then sold to a different taxpayer would not satisfy the new property requirement.
The 50-percent bonus depreciation property is the same type of property which qualified for 30-percent bonus depreciation.
IRS Section 179
Under this IRS program, a company entering into a Lease with a $1 Buyout or a 10% PUT (Capital Lease) may deduct up to $100,000 from their taxable calendar year 2013 income. The primary advantage of this program is that the company does not need to spend $100,000 in this year to claim the $100,000 deduction. The only requirement to be eligible to claim the full deduction in 2013 is to enter into a Lease Agreement before 12/31/ 2013. Smaller Leases are eligible for the deduction on a dollar-for-dollar basis up to $500,000. Larger Leases cannot exceed the $100,000 total tax liability. However, the amount over can be carried forward.
Operating & Fair Market Value Leases
Operating and Fair Market Value (FMV) Leases give the Lessee the option to return the equipment at the Lease termination without any further obligation. Further more, the Lessee also has the option to purchase the equipment for its then fair market value (not previously stated). One final option is to continue leasing the equipment from the Lessor for an additional 12 months at the same monthly rental. Since the Lessee does not own the equipment it will not be shown as an asset or a long term liability on their balance sheet. The Lease is treated as an off-balance sheet operating expense and 100% of the payment is tax deductible.
Lower Your Tax Liability
By paying cash or entering into a Bank loan / security agreement, you may expense the depreciation over the life of the equipment which is based on the IRS accepted useful life. Interest may also be expense during the term of the loan and/or finance agreement. However, with a Capital Lease, depreciation can be expense in it’s entirety within the term you selected (Accelerated Depreciation). Basically, if you enter into a three year Capital Lease and the equipment has a five year useful life, the depreciation expense is accelerated and 100% of the original purchase amount will have been expense in three years.
Avoiding AMT Leasing Benefit
Under the Tax Reform Act of 1986, Congress took aim at small to medium sized Companies that had been reducing their overall tax liability by claiming depreciation on equipment they had acquired. Companies who have used equipment depreciation to significantly lower their tax liability could be subject to a review that may have the effect of classifying some of the depreciation write-offs as “tax preferences” and subjecting those same companies to an additional “Alternative Minimum Tax”, in addition to the taxes they would otherwise owe. Owning or purchasing too much equipment, while lowering the traditional tax component, can now trigger the addition of new added taxes. However, Lease payments that are treated as rentals do not qualify as a tax preference items and have no adverse effect on AMT liability.