I was doing this little marketing project the other day (yes, Fletch wears many hats around here… you should see me when it’s my turn to do the floors!) Anyway, I was writing about Section 179 and equipment financing, and how it can save you money for months after you finance the equipment, etc etc. And I thought I’d share the math with you here.
First of all, I’ve already discussed how Section 179 can actually be profitable this year – that’s because the total amount of taxes saved will almost certainly exceed your equipment financing payments.
But what if we looked at it a different way? What if instead of assuming “the total amount of taxes saved” gets added this year, it instead gets added over time… (keep in mind, nothing is changing – we’re just looking at it differently.)
- You finance a piece of equipment for $50,000 in October 2010
- Your monthly payment is $1,120 a month
- Your annual return/ gain from having the equipment is 3% (or $125 per month)
Let’s stop here for a second. You’re paying $1,120 a month, but you gain $125 a month by having/using the new equipment. Follow?
- This means your “net” monthly payment is $995. ($1,120 – $125 = $995)
- In Dec 2010, you take a 50k Section 179 Deduction. The net tax savings is $17,500
Let’s stop again. We’re paying a net of $995 from Oct 2010-onward. Instead of looking at this $17500 savings as a 2010 number, let’s apply it to our payments over time.
- Taken over the life of the loan (meaning starting from 10/2010), that $17,500 will cover you until February 2012. You will have a positive cash flow until February 2012. This means you used the equipment for 17 months, and knocked 17 months off the equipment financing term, without paying a (net) dime. Where do you see your business in February 2012? Especially with some shiny new equipment.
Read it again if you have to, but this is real, and this is why I’m so bullish on the “Section 179 and equipment financing” combo.