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135 Town & Country Dr
Danville, CA 94526
1914 W. Orangewood Ave
Suite 102
Orange, CA 92868
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Greetings!
As Summer ends we should remind our readers of the upcoming extended income tax filing period deadlines. All December 31, 2011 year end corporate income tax returns which were extended beyond the March 15, filing date are now due no later than September 15, 2012. Personal 1040 income tax returns extended beyond the April 15 filing date are due no later than October 15, 2012. |
New Equipment -- Is it Smarter to Lease or to Buy?
Contractors inevitably reach a point when they know they'll have to retire an old, worn-down piece of equipment and shop around for something new. Deciding on a replacement can be tough. But it's even tougher trying to decide whether buying or leasing that new piece of equipment makes the most sense. What are the issues you should examine before deciding to lease or buy? Consider these:
Examine Your Cash Position First
It's important to analyze your company's upcoming cash needs and the financing options available to you before you opt to buy equipment. You'll want to take into account how financing the purchase could affect your ability to obtain credit for other business needs. The primary advantage to leasing is that it allows you to budget payments over an extended period. You also can structure the lease payment schedule to suit your normal cash flow patterns. Since leasing frees up cash and credit for other investments, leasing may be a good option if your cash flow is not as good as it should be.Your decision to lease or buy may be based largely on your cash flow. A purchase requires you to either dig into your cash reserves or line of credit for the full price or make a cash down payment and finance the remaining cost.
Review Your Tax Situation Along with cash flow, you'll also have to consider the tax and accounting implications of buying or leasing equipment.
Buying Equipment
When you buy equipment, you generally write off the cost as depreciation over time. If eligible, however, you can take advantage of the Internal Revenue Code's Section 179 "expensing" election. This section of the tax code lets you deduct the cost of qualifying assets in the year your business first places them in service -- as opposed to claiming regular depreciation deductions. For 2012, the Section 179 expensing limit is $139,000. This limit will be reduced dollar for dollar as the cost of Section 179-eligible property placed in service in 2012 exceeds $560,000. You cannot expense more than the amount of your taxable income from active trades or businesses. Moreover, your contracting firm may make an election to write off 50% of the cost of new machinery and equipment placed in service during calendar-year 2012. This 50% first-year depreciation reduces the property's basis for purposes of figuring regular depreciation deductions.
Leasing Equipment When you lease equipment, your company may be able to deduct the lease payments as operating expenses. This avoids the alternative minimum tax (AMT) adjustments for depreciation, which can be an important factor if your firm could be subject to the AMT. However, proposed accounting changes that target leasing may have an impact on the attractiveness of leasing. As things currently stand, there are two categories of leases: capital leases, which have to be reported on balance sheets, and operating leases, which can be structured to stay off the balance sheet. The Financial Accounting Standards Board (FASB) has proposed standards that would eliminate off-balance-sheet lease financing. The FASB believes that operating leases create an understatement of assets and liabilities and make it difficult to compare financial results for firms that treat leases differently. Essentially, operating leases would be required to be recorded on the lessee's balance sheet if the proposed changes are adopted. That, in turn, would require significantly more monitoring and recordkeeping and could impact a contractor's ability to obtain loans or bonding at competitive rates.
Talk to Us
New equipment is a significant expense for most contractors. We can help you run the numbers to determine whether buying or leasing makes the most sense for your construction firm.
"It's important to analyze your company's upcoming cash needs and the financing options available to you before you opt to buy equipment."
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New Requirements for Sponsors of Group Health Plans
If your contracting firm sponsors a group health plan, you'll need to comply with new regulations recently issued by the federal government under the Patient Protection and Affordable Care Act (the health care reform law). Starting this fall (basically for open enrollment periods beginning on or after September 23, 2012), group health plans must generally provide plan participants with a Summary of Benefits and Coverage (SBC). This document must provide covered individuals with a clear, plain-language explanation of the benefits and coverage provided by their plans.
The primary purpose behind the new requirement is to ensure that participants in group health plans can understand and compare health coverage options.
Who Should Get the SBC?
All health plan applicants should receive the SBC at the time of application. Generally, all enrollees must receive the SBC before each new plan or policy year. In addition, the SBC should be provided when coverage changes or upon requests by a participant. Beneficiaries are also covered by these requirements.
What It Should Include
The SBC must be no more than four double-sided pages long and contain certain information, such as key benefits and coverage, a list of excluded services, and the cost to participants. The SBC must also contain a "uniform" glossary of terms used in the SBC.
What You Should Do
Coordinate with your insurer (or third party administrator if you have a self-insured plan). Remember, the health insurer is required to provide an SBC to the employer that sponsors the group health plan. The insurer and the employer are jointly responsible for providing the SBC to participants and beneficiaries. Find out from your insurer when the insurer will be providing SBCs and whether the SBCs will be furnished directly to participants and beneficiaries or to you as the plan sponsor. If you sponsor a self-insured plan, contact your third party administrator to discuss the SBC requirements.
Penalties for Noncompliance
Employers who fail to meet the SBC requirement may face penalties of $1,000 per failure per participant. In addition, excise taxes of $100 a day for each participant may apply.
"The primary purpose behind the new requirement is to ensure that participants in group health plans can understand and compare health coverage options."
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JHS is a full service CPA firm specializing in construction accounting and auditing, tax planning and preparation. We also consult with management to assist with business growth, maintenance, succession and financial forensics.
Please contact our office if we can be of service to you.
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