Tax Deductible Payments
Depreciation up to 100 percent
Jobs and Growth Tax Relief Reconciliation Act of 2018;
The Jobs and Growth Tax Relief Reconciliation Act of 2018 (P. L. 108-27) increases the first-year additional depreciation allowance up to 100% of $1,000,000 in NEW or USED equipment. The 100 percent rate applies to property acquired after December 31st, 2020, and placed in service before December 31, 2021. This deduction (if you qualify) will not change if you paid cash and later decide to finance through MAC Financial. Rather you would be able to then write off the interest for the new loan.
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.
IRS Section 179
Under this IRS program, a company entering into a Loan, EFA (Equipment Finance Agreement) , Lease with a $1 Buyout or a 10% PUT (Capital Lease) may deduct up to $1,000,000 from their taxable calendar year 2019 income. The primary advantage of this program is that the company can accelerate up to $1,000,000 in a depreciation deduction. The only requirement to be eligible to claim the full deduction in 2019 is to enter into a Loan or Lease Agreement and take delivery before 12/31/ 2019. Further, the bonus depreciation is 100% and has been made retroactive to 9/27/2017. It is good through 2022. This includes NEW and USED equipment. However, the amount over can be carried forward. Please always check with your accountant to clarify your specific situation. The MAX Spending is $3,500,000 to qualify for section 179 benefits.
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.