When small businesses are first starting out, a huge chunk of their starting capital usually winds up sunk into the equipment they will need to get up and running. If they had looked into obtaining that same equipment through a capital lease, they would have been able to get everything, under much better conditions financially, and would have more money to further invest in their business. And, because of special tax considerations, that lease would have also netted them a significant tax break at the end of the year.

Capital Lease vs. Outright Purchasing

Small businesses have limited funding starting out, that is an unfortunate fact of the business world. If they were to go the route of purchasing all the equipment they need to begin operating, from manufacturing equipment to office equipment, it will mean cutting those startup funds in half, if not more. Granted they might be able to get some warranties on what they purchase, but after that all maintenance or replacement is now their sole responsibility. At the end of the year, at tax time, it becomes part of their overhead, subject to taxation and depreciation.

In a capital lease, however, they can arrange to lease that same equipment, with the intent to purchase. Instead of laying out all that cash at once, they make smaller payments, over time during the length of the lease, with the option to purchase it fully for a very minimal amount. This makes it much easier on their operating budget, and maintenance is taken care of by the leasing company. Depreciation is not applied at year’s end, because ownership is still shared between them and the leasing agent. However, it is still considered to be a purchase, and counts towards the tax benefits that all businesses receive yearly under Section 179 of the tax code.

The Benefits of Section 179

Designed to benefit small business rather than larger concerns, Section 179 of the tax code was created to grant small business owners incentives to invest more capital through purchases for the business. It basically offers tax deductions for the purchase of equipment up to a maximum of $500,000 per year, rather than lose money by having to deduct the depreciation over time since its purchase. However, recent changes have even altered the practice of depreciation, allowing up to 100% of what would have been lost to be taken as a deduction instead. (more…)