Leasing 102 by Mr. Terry Winders, CLP
(This is the first of a continuing regular Leasing News column regarding more current sophisticated information for all segments involved in equipment leasing from a recognized, author, educator and trainer.) Revenue Ruling 179 has been extended until 2008 and gives the business tax payer a right to expense the first $100,000 of capital equipment purchases in the their tax year and then use MACRS depreciation on all additional assets unless they purchase more than $400,000. Each dollar spent over $400,000 will reduce the expense allowance until the total purchases reach $500,000 and then the whole allowance is gone. In 2003 section 202 of JGTRRA expanded the definition of section 179 property to include "off the shelf computer software" (a category of intangible property). In addition, the $100,000 and $400,000 amounts were indexed annually for taxable years beginning after 2003 and before 2008. Inflation has caused the amounts for 2006 to be $ 108,000 and $430,000 respectfully. On July 13, 2005 the ruling was extended through the tax year 2008 What this means is a business may fully expense the cost of the equipment in the year it was purchased in stead of taking MACRS depreciation. Lets say the equipment has a five year life for MACRS. That would mean that the depreciation deductions over the next six years (six years because of the half year convention only allows 50% of the whole years depreciation for the first year thereby taking six years to get five year depreciation) would be 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%. However, the 179 election would allow for 100% of the cost to be deducted from taxable income in the year purchased. An example of this would be if a business purchased $478,000 of capital equipment. That amount that exceeded $430,000 would be subtracted from the $108,000. $478,000 - $430,000 = $48,000 then $108,000 - $48,000 = $60,000. The 179 allowance is reduced to $60,000 and the balance of $418,000 would be depreciated under standard MACRS depreciation tables irregardless of term. Section 179 would appear to be bad for leasing until the company purchases more than $430,000 of equipment. A prudent lessor would encourage the Lessee to lease those purchases over $ 430,000 so as to retain the advantages of RR179. No one knows if this tax ruling will extend beyond 2008, and the United States Congress with their henchman at the IRS are known for making sudden changes of direction when it serves their purpose.. Mr. Terry Winders has been a teacher, consultant, expert witness for the leasing industry for thirty years and can be reached at leaseconsulting@msn.com or 502-327-8666
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