Understanding Section 179 is key for franchise owners seeking to enhance cash flow and reduce taxes. Specialized Accounting Services (SAS) simplifies how this provision benefits your business.
Overview of Section 179
Section 179 lets businesses immediately deduct the full cost of qualifying assets purchased during the tax year, rather than depreciating them over time. This deduction directly lowers taxable income. For 2024, businesses can deduct up to $1,220,000, with phase-outs beginning after $3,050,000 of qualifying purchases. Limits will slightly increase in 2025.
Eligible Assets
Assets that commonly qualify include equipment and machinery, business vehicles and leasehold improvements (interior renovations, excluding structural changes).
Assets that typically do not qualify include real estate, inventory, assets acquired purely for investment or rental income.
Common Pitfalls to Avoid
- Exceeding deduction limits relative to business income
- Mixing personal and business asset usage
- Misclassifying ineligible property
- Overlooking depreciation recapture implications if assets are sold prematurely
Examples of Section 179 in use
1: Equipment Purchase
Scenario: A franchise owner invests $150,000 in new restaurant equipment, all qualifying for the Section 179 deduction.
Calculation: By utilizing Section 179, the franchise owner can deduct the entire $150,000 in the year of purchase, resulting in a significant tax deduction and improving cash flow.
Source: IRS Section 179 Guidelines
2: Vehicle Acquisition
Scenario: A franchisee purchases a new delivery vehicle near the end of Year 1 for $40,000 that qualifies for Section 179. They anticipate much higher net income in Year 2 and assume they may be taxed at a higher rate.
Calculation: By strategically placing the asset into service at the beginning of Year 2, they can take advantage of the Section 179 deduction to offset the higher income and increased rate.
3: Leasehold Improvements
Scenario: A franchisee operating multiple locations of a brand undergoes a combined $2,000,000 in qualifying leasehold improvements to enhance customer experience at each one.
Calculation: Due to annual limitations of Section 179, the franchisee decides to spread out the improvement project over two years so that the costs can be fully deducted in a shorter period of time.
Source: Tax Cuts and Jobs Act of 2017
Case Study: Franco’s Fitness Franchise
Situation: Franco owns and operates a fitness franchise and is considering investing in new gym equipment totaling $200,000.
Strategy: Trying to manage cash flow, Franco decides to finance the purchase and then capitalize on the Section 179 accelerated depreciation as well.
Impact: Not only was Franco able to maintain more control of his cash flow by financing the acquisition, he was still able to write off the full purchase price to reduce his tax liability.
Source: Small Business Administration (SBA) Tax Planning Resources
Key Financial Strategies
To maximize benefits:
- Strategically plan asset purchases each year.
- Evaluate cash vs. financing options to align with business goals.
- Avoid making purchases solely for tax deductions, as unnecessary debt or cash strain may result.
- Involve your accountant before finalizing major purchases. Eligibility and optimal tax strategy depend on specific circumstances. SAS can expertly guide your franchise through the complexities of Section 179, ensuring your decisions support long-term financial goals.
Ready to optimize your franchise’s cash flow and tax savings? Contact Specialized Accounting Services today!
