Here’s the catch-22 for businesses: in order to increase their capital good, equipment is necessary, but to get the equipment, businesses may lack the capital and need tax incentives to help pay for it … and those incentives are currently up in the air.
The extension of the favorable dollar limit on first-year expensing (the so-called Sec. 179 deduction), which was enacted on December 19, 2014, has already expired!
The $500,000 limit that was extended for 2014 no longer applies; instead the dollar limit is set at $25,000, unless Congress takes action. Businesses that depend on the tax savings from this upfront deduction for their capital purchases face tough choices.
Here are some options to consider:
Wait and see
Businesses that need the write-off to help pay for equipment and machinery costing more than $25,000 may want to wait and see what Congress does about extending the favorable dollar limit for the Section 179 deduction. With the new makeup of Congress, serious tax reform in the coming year is possible (but not certain). This could include a permanent, or at least long-term, extension of the $500,000 limit.
Lease instead of buy
The Sec. 179 deduction applies only for businesses that purchase equipment. Those that lease instead of buy can write off all of their lease costs. This fixes the monthly cost for the equipment, which may turn out to be less than the cost of buying it.
This option doesn’t make sense in all cases:
- Leasing may not be an option for certain equipment.
- Businesses are essentially locked in for the term of the lease, which is a detriment if the equipment becomes obsolete before the lease ends.
Buy and finance
If a business needs the equipment now but lacks some or all of the cash to buy it, financing options should be explored:
- Seller-financing. The company selling the equipment may offer financing to swing the deal.
- Working capital loans. For example, Kabbage offers lines for small businesses from $2,000 to $100,000, with a prompt approval based on real-life data, such as your bank account or QuickBooks data (not necessarily a credit report).
For any type of financing, check terms and conditions carefully.
It’s become the norm for businesses to operate without the ability to plan because Congress has failed to fix tax laws for the future. Let’s see what happens now.