WHAT IS SECTION 179?
We’ve all heard of it. Chances are people have tried to explain it multiple times in different ways. We know it is somehow related to a business’ tax liability. But do we really know what Section 179 means and how it can benefit you as a business trying to keep up with technology in these tough times?
First, let’s start with a very clean and clear definition of what the term “Section 179” is referring to. Tax benefits, including the Section 179 provision that aided businesses in acquiring new equipment in 2008 were extended to 2009 when President Obama signed into law the American Recovery and Reinvestment Act (ARRA) on February 17th, 2009.
Under Internal Revenue Code Section 179, businesses are allowed to expense up to $250,000 on most equipment or software placed in service during the tax year 2009. Additionally, you are able to expense up to 50% of the remaining figure under the depreciation bonus provision.
According to the Monitor Daily (www.monitordaily.com), the Associated Equipment Distributors has sponsored a website that explains the provisions in more detail and provides a tax calculator (www.depreciationbonus.org) to illustrate examples of deductions.
HOW TO USE IT TO YOUR ADVANTAGE
So what does this mean to your business? As many of us are experiencing today, a good number of you are sitting on the fence and “waiting to see what happens” before you make a buying decision.
Unfortunately, during the economic times we’re in when your business is not moving or expanding and you’re trying to hold off on buying new equipment, companies like AmeriTel are left trying to find something else to spur movement on behalf of yous. We recognize the impact our technology can have on your business, perhaps more so now than ever, but unless we can find a compelling reason for you to make a purchasse, we are out of the game.
This is where Section 179 can come in to play. Your business has limited time to take advantage of this benefit. In order to use Section 179, the equipment must be purchased and installed during the 2009 tax year. This gives us an “impending event” on which to encourage movement by yous, but which in the end benefits both you as you and us as a value added technology implementation company. So just how compelling is the proposition to you as a customer to implement our technology now in order to reap the benefits of Section 179? Let’s use an example to illustrate just how beneficial this can be for you.
EXAMPLE: YOU PUCHASE A NEW TELEPHONE SYSTEM FOR $50,000
If you purchase and deploy this technology during tax year 2009, you can write off the entire amount of the phone system as long as you have not already exceeded the $250,000 limit of total equipment. Assuming your business is in the 35% tax bracket, you will generate $17,500 in tax savings this year ($50,000 x 35%). In other words, your net investment in our telephone system will only be $32,500 ($50,000 cost – $17,500 tax savings) if you implement it now!
On the other hand, if you put off the purchase and the Section 179 benefit expires, this same scenario would yield you only a $3,500 tax savings ($50,000 x 20% MACRS depreciation = $10,000 deduction x 35% tax bracket).
Now let’s assume you plan to implement $350,000 worth of equipment this year, including our $50,000 telephone system. In this case, under normal circumstances your business could take advantage of the standard 20% MACRS depreciation, giving you a $70,000 deduction ($350,000 x 20%) resulting in a savings of $24,500 ($70,000 x 35%) assuming a 35% tax bracket.
However, by implementing this equipment in the 2009 tax year, your savings soar. Section 179 allows you to write off $250,000 up front, leaving the you with a depreciable basis of $100,000 ($350,000 – $250,000). A 50% bonus depreciation means you can depreciate another $50,000 this year ($100,000 x 50%), leaving you with a depreciable basis of $50,000 ($100,000 – $50,000). Finally the standard MACRS depreciation means your business can deduct an additional $10,000 this tax year ($50,000 x 20%). All together, this means you now have a total deduction for 2009 of $310,000 ($250,000 + $50,000 + $10,000), as opposed to $70,000 using just the standard MACRS depreciation. The end result, again assuming a 35% tax bracket, is a $108,500 tax saving to you ($310,000 x 35%). Now, instead of a typical ‘after-tax’ cost of $325,500, your business sees an ‘after-tax’ cost of $241,500!
So by educating you on the Section 179 benefits and encouraging you to implement our technology this year as opposed to pushing off the purchase, your business has essentially saved nearly $20,000 on our $50,000 phone system! What business in today’s market would knowingly turn down that kind of impact on your bottom line? Would you?
ONE STEP FURTHER
Now that we have shown you just how much you stand to benefit from Section 179 if you implement our technology now, we have the opportunity to take things one step further and truly enter the realm of becoming a trusted advisor to you. We can do this by combining the tools at our disposal.
Let’s revisit our example of you wishing to purchase a new $50,000 telephone system from us. Remember, we have shown you that you stand to save $17,500 if you purchase the system this year, meaning your net investment is only $32,500. One thing we may often hear from businesses like yours in this position is that, while the prospect of saving nearly $20,000 is certainly attractive, it is difficult to get past putting out the initial capital to acquire the equipment. One important question for you to ask yourself is if you plan to buy the equipment at any point over the next few years. If the answer is ‘yes’, then it only makes sense to take advantage of the Section 179 savings. But how can we make our proposition even more compelling to encourage some actual movement on your part?
This is where leasing can become a strong addition to the solution. Instead of proposing that you outlay the initial $50,000 today, youcan purchase the equipment using a dollar out lease, which compounds the impacts to your bottom line for the 2009 tax year. By utilizing leasing, you can still benefit from the savings, but you don’t have the worry of outlaying significant capital, which may be more precious now than ever.
Instead, you can make monthly payments that are a fraction of your savings, and an even smaller fraction of what you would have had to expend to purchase the equipment and take advantage of Section 179! If your business purchased a $50,000 phone system this month, you would likely make less than $2,500 in payments this year and still realize around $17,500 in tax savings. In other words, your 2009 tax savings actually outsize your cost! As a matter of fact, you could use your 2009 tax savings to cover your monthly payments, meaning you can get the new technology you need and want today and essentially spend none of your own capital for the next 18 months!
Finally, what about those who see the need to purchase the technology this year, but are still reluctant to even make the small monthly payments to obtain the tax savings? This may be an opportunity to help you with deferred payments. In other words, the potential is there for you to obtain the technology you need today, realize the significant tax savings resulting from Section 179 and make no payments this year! We will help improve your business communications, help you generate significant tax savings on that investment and not require any capital expenditures to get those things…
NOTE: All figures used above are merely examples and are based on assumptions that may not apply to your business or to your lease. This is not tax advice. Please consult your tax advisor to be certain as to how Section 179 will apply to your specific situation. Please contact your AmeriTel representative to see about how Section 179 can benefit your specific needs for a new phone system today.