The upcoming Fiscal Cliff and all of the impending tax changes that will occur if Congress and President Obama don’t come up with a compromise are certainly grabbing the majority of the headlines. Recently, Mike Lockwood, the president of TEQlease Capital, wrote a post “What the Fiscal Cliff Means for Section 179” and we also issued a news release “Five Things Businesses Need to Know About Section 179 and the Fiscal Cliff”.
Essentially, in both his post and in the TEQlease news release, Lockwood argues that “It never makes sense to base important decisions such as a business expansion or the acquisition of new equipment exclusively on tax incentives. Instead we recommend businesses weigh anticipated efficiencies, whether competitors have gained an advantage with newer equipment, and the availability of equipment with added capabilities as factors which are drivers for acquiring equipment.”
Lockwood recommends that businesses consider the following before making any year end equipment decisions.
- History. In both 2008 and 2010 businesses had to wait to see if Congress would extend 179 deduction benefits and in both instances Congress did. However, Congress extended the 2010 deductions in 2011, not by the end of the year. The effect of the law was made retroactive to 2010. Most likely it will be unknown in 2012 what the law changes will be, if any; and the outcome will not be clear until sometime in 2013. Although there is uncertainty as to what Congress will do and when, by contrast today businesses do know what can be depreciated and deducted in 2012 and can act accordingly now.
- Math. Before making a decision on any equipment or plant acquisition, businesses need to make sure they understand the economics. Meet with your tax advisor now and determine whether deferring a purchase may have an adverse tax impact. Run separate tax scenarios with your advisor including one scenario based on 2012 deduction amounts, a second based on the 2013 deduction amount and a third with pre-Bush Section 179 depreciation allowances.
- Credit. Make sure your business credit is in good shape before deciding on leasing or financing any equipment. In order to secure the best terms, you need to demonstrate your business has a positive cash flow, manageable debt load, positive payment history, and management can demonstrate sound business judgment. If your business credit is not in good shape, now is probably not the time to finance or lease equipment regardless of the deduction.
- Timing. In order to take advantage of the Section 179 deduction in 2012, businesses must have the equipment in place and operational by December 31, 2012. One day later and you may revert to the maximum $25,000 deduction for 2013.
- Indecision. This can be the death knell for many businesses. Businesses that are stuck in a holding position while they wait for Congress may be missing important opportunities.
You can read the entire press release here.