Year-End Tax Planning Tool: Start Here
Use Section 179 and a Strategic Equipment Purchase to Reduce Your Tax Bill

Although gym owners work hard throughout the year to grow membership and revenue, there is one undeniably negative bi-product of growth and profitability: it increases the amount of income available to be taxed by the government. To reduce taxable income, and as a result, the amount of taxes paid, businesses can deduct certain expenses associated with operating the business. One example is the purchase of equipment, which creates a depreciation expense that reduces your taxable income. Typically, the total cost of the equipment is depreciated over the course of three to seven years, with a portion of the cost allocated as an expense each year.

To help stimulate the economy, the U.S. government created a tax incentive – ‘Section 179’ – to encourage business owners to invest in new equipment. Under Section 179, instead of spreading the benefits of depreciation across multiple years, you are able to deduct 100% of the cost of equipment – up to $500,000 – to reduce taxes during the current year.

To demonstrate the potential impact Section 179 may have on your business, we'll walk through an example using the framework provided below. Follow the steps below to adjust the assumptions based on your business/situation. Note: You should always consult with your qualified accountant when it comes to your specific business tax deductions. Additional information on business taxes and Section 179 can be found at www.irs.gov.

Step 1: Enter Your Best Estimate for Annual Taxable Income (Total Revenues Less Total Expenses)
Step 2: Enter Your Best Estimate for Your Effective Tax Rate (Taxes as a % of Taxable Income; Typically 20-35%)
This Results in an Estimated Tax Bill for the Year of:
No one likes paying taxes, but everyone likes new equipment. Let's explore how a strategic equipment purchase near year end can significantly reduce taxable income by utilizing the Section 179 deduction.
Evaluate the Impact
of Section 179

We'll start by evaluating the estimated impact of an outright purchase based on the assumptions input above. Keep in mind that you can eliminate your taxable income entirely by purchasing an equivalent amount of new equipment, but that does not have to be the case.

Step 3: Enter the Total Cost of Equipment Purchased to Take Advantage of Section 179
Estimated Annual Taxable Income (Before Equipment Order)
Less: Section 179 Deduction Created by Strategic Equipment Order at Year End
After Accounting for the Section 179 Deduction, this Results in Estimated Taxable Income for the Year of:
Which results in an Estimated Tax Bill for the Year of:
And a Total Reduction in Estimated Taxes Paid for the Year:

By reducing the amount of tax to be paid by the business, you have effectively reduced the true cost of the equipment to the business. It's as if the government was holding its own "Black Friday" sale and all equipment is being offered at a discount equal to your effective tax rate (which can approach 40% for top tax brackets).

Cost of Equipment Order
Less: Reduction in Estimated Taxes from Section 179 Deduction
After Accounting for the Section 179 Deduction, this Results in an Effective Cost of:
Which Results in Effective Discount to Original Cost of:

Of course, in order to purchase the equipment outright, the business would need to have cash available to cover the entire cost of the order. As we continue below, we will explore the impact of financing the equipment purchase instead of paying cash.

Your Section 179 Tax Assumptions

Throughout this process we'll keep your key assumptions here for easy access. You can always go back to refresh yourself about these data points, but feel free to make any adjustments here directly.

1. Estimated Pre-Tax Income
2. Estimated Tax Rate
3. Cost of Equipment Order
Tax Savings with Section 179:
Estimate the Cash Flow
Benefit from Leasing

Section 179 can be particularly beneficial for businesses that lease equipment. An equipment lease minimizes the initial cash outlay, but still allows the business to take advantage of the full deduction. By making a strategic investment toward the end of the year, the tax savings can vastly exceed the out-of-pocket cost of the lease during that year. This creates a unique opportunity for sophisticated gym owners preparing for the new year.

Continuing with the example from above, we'll demonstrate the impact of leasing using the following example terms:

Cost of Equipment Order (Amount Financed)
Step 4: Select The Month in which the Equipment Order is Placed
Step 5: Select a Financing Payment Term Length
Which Results in an Approximate Monthly Equipment Lease Payment of:

Instead of needing funding for the entire cost of the equipment order, the amount actually paid to lease the equipment is significantly reduced. As a result of the sizable deduction that's created, some business owners may be surprised to find that the total amount of lease payments made in the current year will actually be less than the tax benefit created through the Section 179 deduction.

Here is an example of the payments made towards the example equipment lease in during the current year:

Origination Fee (3% of the Cost of Equipment)
Interim Rent Charge (Assumed at 2 Weeks)
Security Deposit (Final Lease Payment Due at Closing)
Total Scheduled Monthly Lease Payments Made During Tax Year
Which Results in a Total Amount Paid Towards the Equipment Lease During the Year of:

As depicted in the original example, utilizing the Section 179 Deduction reduced the total amount of taxes to be paid by the business. The table below compares the amount of tax savings generated through the deduction to the total amount of cash paid towards the equipment lease during the tax year:

Reduction in Estimated Taxes from Section 179 Deduction
Less: Total Cash Paid Towards Equipment Lease During the Year
Which Results in Net Cash Savings Generated through the Section 179 Deduction of:

Your Section 179 Tax Assumptions

Throughout this process we'll keep your key assumptions here for easy access. You can always go back to refresh yourself about these data points, but feel free to make any adjustments here directly.

1. Estimated Pre-Tax Income
2. Estimated Tax Rate
3. Cost of Equipment Order
Tax Savings with Section 179:
4. Month of Equipment Order:
5. Lease Term Length (Months):
Estimated Monthly Lease Payment:
Total Paid Towards Lease in :
Cash Savings Generated by Lease:

I'm ready to capitalize on this opportunity NOW!

Use Tax Deductions to
Calculate the True Costs

Despite the near-term cash flow benefits, the total amount paid under an equipment lease is almost certainly going to exceed the original cost of the equipment - this is the implied interest or implied cost of financing. Continuing with our example, we can compare the total cost due under the example lease structure versus an outright purchase.

Total Cost of Equipment Including All Finance Charges
Less: Original Cost of Equipment
Implied Total Cost of Leasing Over Months (Before Tax-Related Deductions)

Depending on your effective tax rate and anticipated lease term length, you may find that the cost of financing is more than offset by the tax savings generated through Section 179 and other deductions.

Implied Total Cost of Leasing Over Months (Before Any Reductions)
Less: Cash Savings Generated through Section 179 Deduction
Less: Cash Savings Generated through Future Deductions of Finance Charges
Implied Net Cost of Leasing Over Months (After Tax Savings)

By focusing on the cash savings generated by these tax deductions, we can translate the total savings into an effective monthly figure based on the financing term length:

Cash Savings Generated through Section 179 Deduction
Cash Savings Generated through Future Deductions Related to Finance Charges
Total Cash Savings Generated
Implied Monthly Cash Savings Over Months

This allows us to quantify the effective monthly cost of the equipment lease after adjusting for the tax shields created through the structure of the lease:

Monthly Equipment Lease Payment
Less: Implied Monthly Cash Savings Over Months
Tax-Effected Monthly Equipment Lease Payment

Your Section 179 Tax Assumptions

Throughout this process we'll keep your key assumptions here for easy access. You can always go back to refresh yourself about these data points, but feel free to make any adjustments here directly.

1. Estimated Pre-Tax Income
2. Estimated Tax Rate
3. Cost of Equipment Order
Tax Savings with Section 179:
4. Month of Equipment Order:
5. Lease Term Length (Months):
Estimated Monthly Lease Payment:
Total Paid Towards Lease in :
Cash Savings Generated by Lease:
Monthly Cash Savings Over Lease Term:
Tax-Effected Monthly Lease Payment:

I'm ready to capitalize on this opportunity NOW!

Assess Membership Coverage
& Enhance Your ROI

Apart from the tax benefits associated with investing in new equipment for your business, a savvy owner will also consider what they need to accomplish in order to generate an adequate return on their capital/investment. By converting the large up-front cost of the equipment order into a stream of monthly payments, this becomes even easier to quantify - in essence, we need only add (or avoid losing through improved retention) enough members to cover the cost of the monthly lease payment.

To demonstrate, enter your Average Revenue per Member per Month below to see the implied number of members needed to cover the estimated equipment lease payment from our example above (on an un-adjusted as well as on a tax-effected basis):

Step 6: Average Revenue Per Member Per Month
Required Members to be Added/Retained to Cover Actual Monthly Cost of New Equipment
Required Members to be Added/Retained to Cover Tax-Effected Monthly Cost of New Equipment

Your Section 179 Tax Assumptions

Throughout this process we'll keep your key assumptions here for easy access. You can always go back to refresh yourself about these data points, but feel free to make any adjustments here directly.

Estimated Pre-Tax Income
Estimated Tax Rate
Cost of Equipment Order
Tax Savings with Section 179:
Month of Equipment Order:
Lease Term Length (Months):
Estimated Monthly Lease Payment:
Total Paid Towards Lease in :
Cash Savings Generated by Lease:
Monthly Cash Savings Over Lease Term:
Tax-Effected Monthly Lease Payment:
Step 6: Avg Monthly Revenue Per/Member
Members Needed to Cover the Lease Cost:
Members Needed to Cover the Tax-Effected Lease Cost:
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