179 Question

Mickey_D · Nov 13, 2013

Due to some good orders this year, I am going to be sitting on more cash than expected at the end of the year and don't want to send any more to the IRS than necessary. I leased two machines this year, one has a 60K payoff with a 2% early penalty and the other a 100K payoff with a 3% penalty. I have pinged the accountant about this, but no answer yet, but if I buyout the leases on these machines can I 179 them? Anyone have any experience here doing this? I really hate making payments and killing these off would be great.

toolmaker96 · Nov 13, 2013

Are these dollar buy out leases, if so they are really a loan. You do not need to pay them off in order to take the section 179.

SDConcepts · Nov 13, 2013

noone likes paying the irs but in these still incertain times i'd pay the man and hang onto as much cash as i could.

TimD · Nov 14, 2013

To reiterate. It's like toolmaker says. With the right lease type you can take the accelerated deduction without paying off the lease. Something to remember though is that you'll have less for deductions next year if you do. Doing it this year may be a great idea but it's always a good idea to think about next year too. Some thinking points. Was profit this year unusually high? Will you be buying more depreciable assets in the next year? These are good things to think about and discuss with your accountant if you have one. You don't want to be kicking yourself next year.

Also keep in mind that you get an extra years worth of interest it it makes since to do it all this year.

vwfullcup · Nov 14, 2013

you can already 179 them just by having an active lease. Do what we are doing and just purchase more equipment outright if you have the money...

toolmaker96 · Nov 14, 2013

vwfullcup said:
you can already 179 them just by having an active lease. Do what we are doing and just purchase more equipment outright if you have the money...

Buying outright makes absolutely no difference to the depreciation schedule. Only time that helps is if you are going to expense a purchase. Try expensing capital expenditures & the IRS will want to have a discussion with you.

Red James · Nov 14, 2013

If you have a TRUE LEASE then you have pure expense as you make your lease payments, and the lease company gets all of the depreciation. . .you get none because you did not buy the equipment, and in fact you have to return the equipment to the leasing company at the end of the lease. The lease company MAY sell you the equipment at its then market value, and this is still a true lease. If the lease STATES a $ buyout amount to own the equipment at the end of the lease period then you DO NOT HAVE A TRUE LEASE and you can depreciate. READ YOUR LEASE AGREEMENT WITH YOUR ACCOUNTANT.

scadvice · Nov 14, 2013

Ok...If it was me, I would first max out a retirement account like IRAor Sep first. Then look at payoffs ect.

gbent · Nov 14, 2013

toolmaker96 said:
Buying outright makes absolutely no difference to the depreciation schedule. Only time that helps is if you are going to expense a purchase. Try expensing capital expenditures & the IRS will want to have a discussion with you.

Section 179 is specifically about expensing capital expenditures. IIRC you are still allowed $500,000 in section 179 deductions for 2013, as long as you don't put more than $2,000,000 in section 179 allowable equipment in service during 2013.

The section 179 drops to $25,000 in 2014. If you are on the fence about buying this year or next, being able to expense the item is a pretty powerful reason to buy this year. But the item must be available for use on or before December 31, 2013. So time is getting short.

rollmaker · Nov 16, 2013

The govt has been renewing this tax advantage for several years now. What is everyone hearing about them finally stopping, reducing this carrot in 2014,considering their excessive spending habits.

cmccull166 · Nov 16, 2013

I asked my accountant "how do I owe taxes on profits when I dont have any money" His reply "cause you spent it"?????

munruh · Nov 16, 2013

gbent said:
Section 179 is specifically about expensing capital expenditures. IIRC you are still allowed $500,000 in section 179 deductions for 2013, as long as you don't put more than $2,000,000 in section 179 allowable equipment in service during 2013.

The section 179 drops to $25,000 in 2014. If you are on the fence about buying this year or next, being able to expense the item is a pretty powerful reason to buy this year. But the item must be available for use on or before December 31, 2013. So time is getting short.

Had a meeting with our accountant last week and she is saying most likely section 179 will be 125,000 to 145,000 next year..............but she can't promise

scadvice · Nov 17, 2013

We always pay ahead our shop rent also about three or four months and any thing else we can like insurance, load up on tooling and cutters, drills, coolant, and anything else we know we will need for the coming year. Software upgrades ect also...

EndlessWaltz · Dec 14, 2016

That time of year so I wanted to bump this with a stupid question, and need an answer in simple terminology.

I think of a section 179 as trying to lower your over all income for a given year to fall in a lower tax bracket correct? So typically lets say one bracket is from 90k to 100k. If you bought equipment that only equaled 5k...you have not fallen into a lower tax bracket(below 90k).Correct? That is the overall goal in simple terms?

It just seems alot of people, even business owners; don't truly understand it, but just that it will "save" them money.

thanks in advance.

Houndogforever · Dec 14, 2016

I start the year anticipating making about $40,000 profit for the year based on past history. By the end of 3rd quarter, I have a pretty good idea what my year end profit will be. This year it looks like it might be 2x that amount. That means I would have to pay taxes on that extra profit. Figure 25%fed and 9% state tax so essentially 1/3 of ANY profit above my estimate goes away to the taxman. 1/3 of $40,000 extra profit =$13,600 of additional tax that I would owe. Who wants to send an extra $14k off to the gubmnt?

So I bought a new Speedio. $100k, of which I can expense off all $80k of profit. That puts an extra $27,200 in my pocket this year. PLUS I get the extra $20k of section 179 next year which means if I can keep profit in the $60k range, I won't have to send more tax payments in than my current plan.

As far as tax brackets go, say the 25% tax bracket is 90-100k. All the income from 0 to 90 is taxed at the 15% bracket, and then ONLY the additional $10,000 would be taxed at the higher rate of say 25%. $90k x 15% = $13,500 taxes, PLUS 25%of the extra 10,000= $2500, so your total tax on $100k is 13,500+2500= $16,000 $16,000 is obviously only 16% of 100k, so really are not saving that much by just dropping you down a bracket.

Hope this clarifies a little, or at least doesn't confuse you even more.
Jon

gbent · Dec 14, 2016

If your business is a corporation the federal 15% rate is for profit up to 50,000. $50K to $75K 25%, and $75K to $100K is 34%. $100K to $335K is 39%.

But if you are a corporation remember you have a two year loss carryback option. If you want a significant piece of equipment but don't have your ducks in a row to buy it paying Uncle Sam taxes on high income this year may be a better option than making a rush purchase that isn't what you need.

One unique thing about section 179 depreciation is section 179 can't be taken to give you a loss. You can take enough section 179 to break even, but not to show a loss.

Sometimes bonus depreciation is a better option. Bonus is only available on new purchases, not used. You can take 1/2 of the cost the first year, and then depreciate the balance using the standard depreciation life table. Bonus depreciation can be used to put you in a loss situation. So if you had a great year last year or the year before, you may be able to use bonus depreciation to recapture some of your previous years already paid taxes.

EndlessWaltz · Dec 15, 2016

Thanks guys for the explanations and dumbing it down. Makes sense...or cents.. I am here all week.

Oldwrench · Dec 18, 2016

gbent said:
If your business is a corporation the federal 15% rate is for profit up to 50,000. $50K to $75K 25%, and $75K to $100K is 34%. $100K to $335K is 39%.

Only applies to C corp. No tax on S corp--the earnings go on the stockholder's 1040. Net effect of the Section 179 is the same.

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