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By Tim Murphy, Vice President of Lease Consultants Corporation
Even if Tax Day isn’t right around the corner, it’s important to remember that tax benefits for the current calendar year apply to any purchases you make throughout the year. For most small businesses, the IRS allows the entire cost of equipment and software purchased each year to be deducted on that year’s tax return. For 2021, as a matter of fact, businesses can claim up to $1,050,000 if they spend less than $2,620,000 on total equipment purchases.
U.S. Internal Revenue Code Section 179 is what allows businesses to do this when acquiring assets like equipment and software. The deductions allowed by this impact your tax bill by reducing the amount of your taxable income. The limit on how much you can claim changes every year, but the concept is always the same: Purchase of qualified equipment or software is an expense you can claim that lowers your taxable income by the entire amount of the purchase price.
Here’s how the math works for a cash purchase:
Equipment Cost: $40,000 Deductible Expense: $40,000 Tax Savings ($40,000 x 21% tax rate): $8,400 Equipment Cost After Tax Savings: $31,600
Now let’s say you acquire a new asset with a three-year loan, for example. From the date you take possession of the equipment or software until Tax Day, you would likely pay 12 months of payments at most, which is about one-third of the total cost. When you file your taxes for the year, though, you get to deduct the entire purchase price from your taxes.
What does this mean? It increases your short-term cash flow! The tax deduction in April will most likely be more than the amount of cash you actually paid between taking possession and Tax Day. So if your business is in growth mode or looking to preserve cash, the combination of Section 179 and financing can be a winning strategy for all pharmacy types.
Keep in mind that to qualify for a Section 179 deduction, you must take possession of the asset by the end of the year. On December 31, if the equipment isn’t in place, you will miss the tax savings for the year. There are limits to Section 179 as well, and certain types of assets will not qualify. You should talk with your tax advisor for more details and advice for your specific business.
“On December 31, if the equipment isn’t in place, you will miss the tax savings for the year.”
Lease Consultants Corporation has partnered with PCCA to finance equipment purchases for over 800 U.S. pharmacies in the last 10 years. To learn more about this option, talk with your PCCA account manager to see how our Easy Pay financing program can help you acquire the equipment and software you need and retain your Section 179 tax benefits.
Tim Murphy, Vice President at Lease Consultants Corporation, has over 20 years of B2B finance experience. He assists small and midsize businesses acquire equipment and assets to help them grow. Tim is the architect behind EquipMoney.com, a service of Lease Consultants Corporation that uses cutting-edge credit technology to offer instant credit decisions and instant digital signatures. By incorporating a personal connection with technology, the company has financed over $200 million in assets in the last 10 years.