Do Your Franchisees Make These Mistakes at Tax Time?

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Are you overpaying on your equipment purchases?

Because you didn't use the right tax planning device?

As we approach the end of 2012, now is a great time to start thinking about not just last minute equipment purchases, but also tax time.

So, if you're in need of any new kitchen equipment or a business vehicle, don't put off that purchase any longer - not only because 2013 is right around the corner, but also because the benefits of the Section 179 tax deduction is expected to reduce significantly at the end of the year.

What is Section 179? Section 179 probably sounds more complicated than it really is. It is a simple tax deduction in the IRS tax code that has been around since 1981 and was developed as an incentive for businesses to invest in their own growth.

While it has been revised numerous times over the years, the most recent changes took effect January 2, 2012 and allow franchisees to immediately deduct up to $139,000 on qualifying equipment and software purchases, with the maximum amount that can be spent being raised to $560,000.

This type of incentive can yield substantial cash savings for a franchise while helping to provide access to equipment that is needed for recommended equipment upgrades, an expansion, or to replace broken equipment. The deduction isn't automatic, however, and franchisees need to do the proper paperwork.

It's easy to take advantage of these savings, provided you know how to go about it. While we aren't tax professionals and you shouldn't consider this tax advice, we have learned quite a bit about Section 179 over the years.

Below are answers to some of the most common questions we hear regarding Section 179.

What Qualifies for Section 179? The best part of the Section 179 deduction is that it can be used for a whole host of qualifying equipment purchases, whether they're required or recommended upgrades, or to replace a broken or worn out essential equipment. From new soft serve ice cream machines, ovens, POS systems, or even computer hardware and software, almost any equipment purchase is included.

The catch is that the equipment must be purchased AND put into operation during the tax year. Some examples of qualifying purchases include:

  • Capital Equipment
  • Business Vehicles (gross weight in excess of 6,000 lbs.)
  • Computers
  • Software
  • Ovens & Other Kitchen Equipment

How to Prevent Overpaying using the Section 179 deduction

You will need to complete Part One of IRS form 4562, a relatively simple form but one you'll need to track down on the IRS website.

Make sure to work with your tax professional to take advantage of this lucrative incentive for your franchise and ensure they have experience with Section 179.

How much is the section 179 deduction worth? For the 2012 tax year, businesses may take a 100% deduction on purchased or leased equipment, as long as the total is below $139,000. This is in contrast to previous years, when the total was as high as $500,000. We'll discuss this in more detail in the next section.

How was Section 179 affected by the various Stimulus Acts? The last six years have seen significant changes in the Section 179 Deduction due to various Stimulus Acts enacted by congress - most specifically related to the dollar limits of the deduction.

The limits by tax year:

2007 Deduction Limit: $125,000

2008 Deduction Limit: $250,000

2009 Deduction Limit: $250,000

2010 Deduction Limit: $500,000

2011 Deduction Limit: $500,000

2012 Deduction Limit: $139,000

Deduction decreases dollar-for-dollar after equipment purchase totals exceed the following:

2007 Total equipment purchases: $500,000

2008/2009 Total equipment purchases: $800,000

2010/2011 Total equipment purchases: $200,000,000

2012 Total equipment purchases: $560,000

How was Section 179 affected by the Tax Relief Act of 2010?

This act impacted the Bonus Depreciation available to businesses under Section 179.

In 2012, there is 50% Bonus Depreciation available for new equipment purchases once the $560,000 limit is reached (or for businesses reporting net losses in 2012).

What will happen to the dollar limits of the deduction 2013? The current law states that the deduction will decrease again to $25,000 in 2013.

This number could be changed by Congress if they tackle it in the next legislative session.

When can I take advantage of Section 179 deductions? The deadline for the purchase and deployment of eligible equipment is December 31, 2012. You will make the deduction as you are filing your tax return for the year. Remember, it's possible that the amount will decrease next year, so you'll want to take advantage of this deduction as soon as possible!

How do I determine my deduction? Let's take a look at some example savings, assuming an equipment purchase totaling $65,000.

Your Equipment Cost: $65,000 Section 179 Deduction (up to $139,000): $65,000 50% Bonus Deduction* (Equipment Cost - Deduction) x 50% *only for new equipment $0 Total First Year Deduction (Section 179 Deduction + Bonus Deduction) $65,000 Total Savings (Total Deduction x 35% Tax Rate) $22,750 Equipment Cost After Savings (Equipment Cost - Total Savings) $42,250  

In this example, you'd save a whopping $22,750. That's the kind of sizable saving that many franchisees miss by failing to file for this deduction.

Is it better to purchase or lease to take advantage of Section 179? Ultimately the buy vs. lease will depend on your businesses situation, but an important fact about leasing is this: with the Section 179 deduction, you can write off 100% (up to $139,000) of the price of your qualifying equipment but you don't have to spend 100%.

This means that with a properly structured lease, your tax deduction can actually be more than your first year of payments. Don't forget, the limits for this deduction have been dramatically decreasing over the years and will decrease again in 2013, likely to as little as $25,000. There is no guarantee that the total will increase above that in the future.

So, if you're thinking you may be in the market for some new equipment, now is the time to jump on it. For more information, be sure to contact your local tax advisor to discuss your specific situation.

Have other projects planned? Direct Capital also offers financing programs for remodels, new stores, relocations, equipment & technology upgrades and more!

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About this Entry

This page contains a single entry by Sherri Starcher published on December 11, 2012 9:07 AM.

9 Essential Year-End Deadlines For Your Franchise Operators was the previous entry in this blog.

What You Need to Know about Right-to-Work Legislation is the next entry in this blog.

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