Preface: Purchasing equipment for a business has far broader implications than how much it saves you in taxes. This blog provides understandable and concise narrative on the appropriate tax process to purchasing equipment.
Taxes and Equipment Purchases
Credit: Jacob M. Dietz, CPA
Did you make a large equipment purchase recently? If so, what thoughts scampered through your mind? Thoughts could range widely, from “operating this is a lot of fun” to “how will I pay this off” to “this will help with my taxes.” Often, business owners think of the tax benefits when purchasing new capital assets, such as a forklift. This article examines how the date in service affects the deduction.
Depreciation
First, let’s examine how deprecation works. Companies deduct certain expenditures immediately as business expenses. Examples can include maintenance, office supplies, etc.
Other expenditures, however, the company capitalizes as an asset. The expense then comes through depreciation or 179 expense. Generally, the full cost of the capitalized asset does get written-off by a business, but sometimes it is over many years. For example, wood product manufacturing equipment can have a 7 year recovery period. In 2019, there are two options, bonus depreciation and 179 expense, that can allow the business to take the full expense of certain assets, such as a forklift, in the first year in service.
Date in Service Matters
The date in service matters because it determines when depreciation starts, and when bonus depreciation and 179 expense can be taken, if applicable. If a business buys a $100,000 piece of equipment and takes 100% bonus depreciation on it, it can make a significant difference if that equipment was placed in service December 31st or January 1st. The difference in expense for the year could be $100,000. If it was placed in service January 1st, however, the deduction is not lost. it is just deferred into the future. A taxpayer generally receives the same amount of write-off for the capitalized asset, but the year and way in which it is taken may be different.
So how does a taxpayer decide when to put an asset in service? There are multiple considerations.
First, when does the taxpayer need the asset? If the asset, a forklift for example, will not be needed for another 3 years because the current forklift is still working fine, then the taxpayer likely should keep using the older forklift instead of replacing it with a new one just to put a new asset in service and get a tax break. Tax breaks and benefits are great, but the tax pros and cons should not be the only factor in the decision.
On the other hand, assume that the business decides that they need a new forklift no later than February. In that situation, if the business wants the tax break earlier, they may speed up the process and purchase the forklift and place it in service in December, rather than waiting until February. Unless cash is too tight, a small adjustment in the schedule could be beneficial because of a quicker tax break.
Another consideration is when does a business want a tax break? Generally, but not always, a business will want the tax break sooner rather than later. The time value of money can contribute to this desire.
Conclusion of Segment I