Equipment Financing Mailbag

By | July 28, 2008

section 179 makes capital lease expenditures more advantageousSometimes, I get e-mail comments to my blog posts. The Section 179 posts in particular got some comments. These are always friendly discussions, mind you, and typically fairly short, as I usually just try to further clarify my point.

Recently, I got the following in my inbox, and I thought it might be interesting to post it here, along with my reply (mind you, I asked for, and got, permission from the sender to post this.)

Dear Fletch,

Recently, you advocated financing equipment in 2008 because of the economic stimulus act of 2008 and section 179. You were advocating people purchasing equipment this year because they could write off the entire thing. But I feel that, in the interest of full disclosure, that you should also mention that for years two, three, and beyond, you do not get write-offs on the equipment in question, essentially making the savings a one year thing. Do you agree?

Sincerely,

Sam A

Dear Sam,

Thanks for your note.

Yes, you are correct in that the section 179 deduction is usually a one-year benefit. However, two things I want to mention on that: The first is that for this year, thanks to the Economic Stimulus Act of 2008, there is a bonus depreciation that kicks in after you reach the limits. So even on some equipment that will be depreciating (and not writing off the entire cost) there’s still incentive to finance equipment now.

Secondly, in regards to it being a one-year thing… well, so what if it is? I’m not sure it really makes any difference. Allow me to explain:

I don’t mention year two, three and beyond in my post because they don’t really matter in the sense of saving money on taxes this year. Look at it this way: you cannot deduct MORE than the price of the equipment, regardless of how you do it. Say something costs $50,000, if you elect to use the Section 179 deduction you deduct the entire $50,000 this year. If you elect to depreciate, you deduct $10,000 a year for five years. Either way, you are deducting $50,000. No more, no less.

That said, with all else being equal, wouldn’t you rather have the ENTIRE $50,000 RIGHT NOW as opposed to a little at a time? Because getting that sum right now allows you more choices in other matters financial. And, if you invest it, you can earn interest on it, making it grow (while with the five year depreciation plan, the government instead earns the interest on your deduction.)

So yes, the Section 179 deduction doesn’t give you anything extra, so to say, in terms of raw dollars it just allows you to keep more money NOW. But to me, that’s a pretty obvious benefit, so much so that I’m not sure that mentioning but remember, you don’t depreciate in year two is even necessary. I suppose it is because I do not see any downside to getting all the money now.

One last point on this, too. If you finance or lease equipment, the money you save on taxes this year could actually EXCEED the finance or lease payments you make. So the Section 179 deduction could actually make leasing equipment profitable for 2008 & I don’t know many CFO’s that will turn their nose up at that.

I thank you for the opportunity to clarify and expand my thoughts on this issue. In addition, I find this interesting enough that I’d like to post this discussion to the blog. that way your point will be up there for all to see. Would that be ok? Please let me know.

I wish you all the best.  Chris Fletcher

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