As the fiscal year draws to a close, you may be weighing the merits of a year-end heavy equipment purchase. There can be many benefits, from optimizing taxable income to enhancing operational capabilities, plus it can boost your financial position for future success. Nitesh Kalwar, financing strategy and risk manager, discusses this strategic investment and how it can pave the way for a healthier financial outlook as well as a competitive edge in the construction industry.
Section 179 Qualifying Equipment
Year-end heavy equipment purchases can be a smart move if you’re looking to lighten your tax load and gear up for the year ahead.
That’s because Section 179 of the IRS tax code allows companies — including those in construction, forestry, mining and recycling — to take a tax deduction equal to the price of qualifying equipment purchases in a given tax year.
For instance, if you financed $100,000 worth of equipment, you can deduct the full $100,000 even if you haven’t paid off the entire equipment purchase within the calendar year.
A few things to note from the Section 179 tax deduction:
- Any business that purchases, finances or leases new or used equipment during the 2023 tax year should qualify for Section 179. However, they will need to spend less than $4,050,000 on equipment.
- Most companies can write off the entire cost of qualifying equipment on their 2023 tax return, up to $1,160,000.
- The equipment must be used for business purposes more than 50% of the time to qualify. You can multiply the cost of the equipment by the percentage of your business use to determine the amount you are eligible for under Section 179.
Note that Section 179 differs from bonus depreciation.
Bonus depreciation, in Section 168(k) of the tax code, allows you to expense 80% of equipment purchases in 2023, and it kicks in where Section 179 leaves off. It’s beneficial if you exceed the Section 179 spending cap, which is currently at $4,050,000 on new equipment.
Each small business’s situation differs and tax code details change year to year, so the following information should not be taken as legal or tax advice.
Exploring Section 179 with your tax advisor could lead to a big heavy equipment tax deduction on a year-end purchase of your next piece of equipment.
You can also use the Section 179 Tax Deduction Calculator™ to get a general sense of your cost savings. The calculator allows you to enter your equipment costs and tax bracket to calculate potential tax savings.
Tax Benefits of Leasing vs. Buying Equipment
In addition to taking advantage of Section 179, there are several ways you can offset the cost of buying equipment by buying, leasing or financing construction equipment.
The two most common options for construction equipment financing are leasing and borrowing money (i.e., taking out a loan).
With a lease, you normally make a smaller monthly payment for a set period, and you have the option to purchase the machine at the end of your lease term. Your documents package will list how much the equipment will cost at the end of the lease before you finalize the deal. With a loan, you borrow money upfront to make monthly payments for the purchase, and you own the equipment at the end of the loan term.
Equipment loans typically have higher repayment plans than leases do. You may be able to lower the monthly lease payment or loan payment by making a larger down payment on new equipment.
If you need a machine for a short-term project or seasonal work, such as snow removal, leasing may make more sense. A lease may also be beneficial if you are working in harsh environments such as demolition where your equipment may need to be replaced more often. But, if you prefer to keep equipment longer and it’s fundamental to your daily operations, you may be better off financially by taking out an equipment loan.
A financing alternative to leasing or loans is a rental purchase option (RPO), which is a rental agreement that applies a percentage of your rental payment toward the purchase price of equipment.
At the end of your rental term, you have the option to purchase the equipment. An RPO makes sense if you are unsure how long you’ll need a machine for a project or if you are new to heavy equipment. With an RPO, you have time to see whether the machine is best for your project or business while building equity in the equipment.
Interest rates vary for equipment leases and loans depending on your business, your credit score and how many pieces of equipment you’re purchasing.
Most lenders offer unsubsidized rates and subsidized rates. Unsubsidized rates (standard rates) on most equipment loans range from 6% to 9%. However, some lenders can offer subsidized rates of 0% financing on selected terms so you don’t pay any interest.
Typical financing terms range from 12 months to 60 months, but the most popular term for financing construction equipment is 36 months.
Some manufacturers offer a 72-month term for smaller construction equipment, such as mini excavators. Compare rates, terms and fees when shopping for an equipment loan.
How to Apply for Heavy Equipment Financing
The application process for leasing and buying equipment can vary depending on where you apply. Start by speaking with your local dealer to determine what financing or leasing options make sense for your business.
If you want to finance through your dealer, they can direct you to an online portal to apply. This is typically a one-page credit application that requests basic information about your business, including company legal name, address, phone number, tax ID and requested financing amount. You can provide personal information to get a personal guarantee on the request. Generally, a personal guarantee is recommended if you are a newer business.
Once your dealer has all your information, a sales specialist can submit a credit application in less than 30 seconds.
While every lender is different, it’s usually easier to qualify for an equipment loan or lease with a manufacturing lending partner.
If you’ve been operating your business for a few years and have a good credit history and comparable borrowing and cash flow, you may qualify for a loan or lease at a competitive rate. If you have limited credit history or cash flow, you may be able to qualify by showing your business expenses or financials or offering a down payment for the equipment. Your dealer may also decide to work with alternative lending partners to help you figure out financing options.
Once a lender receives your information, you can usually find out if you’re approved within minutes; although some lenders can take 3 to 5 business days if you have existing exposure or your current request needs structuring. If you’re approved, all you need to do is sign paperwork and receive equipment delivery; the funds will be disbursed directly to your dealership.
Understanding heavy equipment tax write-offs, like Section 179 and equipment financing, can help you preserve your cash. Learn more about heavy equipment tax benefits and how they can help your business.