The Great Recession has prompted many individuals to start their own businesses, and one of the most important considerations is purchasing equipment for that business. CPA firms can provide invaluable guidance on buying new or used equipment, financing options, collateral requirements and the timing of equipment purchases to optimize tax savings.
Entrepreneurs have a wide range of options when it comes to purchasing equipment. They can always pay full retail price for new equipment, but used equipment can offer significant savings. In particular, used office furnishings are often a fraction of the purchase price of new furniture. And entrepreneurs now have more places to shop than ever before, as more and more people get into (and out of) home businesses. Options include yard and estate sales, secondhand dealers, thrift stores, local newspaper classifieds, trade publications and online marketplaces such as the Government Liquidation website, which sells surplus vehicles, equipment and scrap metal for the U.S. Department of Defense. Sometimes used equipment is still covered by original warranties as well, although it should be confirmed that the benefits are transferable.
Financing options have also proliferated, and getting the best deal can make a huge difference to the bottom line – especially in the early stages of a new enterprise. Again, entrepreneurs have many places to shop to compare financing packages. Professionals are available to help evaluate the credit packages offered by banks, independent financing companies, vendors and manufacturers. Financing provisions can vary greatly, from interest rates and down payment amounts to loan durations, late payment charges and security requirements. Entrepreneurs need to determine what features and conditions are most important to them to negotiate the best price, an optimum payment schedule and any collateral requirements. Will you have to put up other assets to secure the needed equipment? Do you need to secure the lender’s permission for further asset acquisitions? What constitutes a default? Business owners should carefully consider any possible restrictions on business operations due to lender requirements.
Significant savings can also be realized from tax considerations, including federal and state tax incentives, the use of current year expensing or multiyear depreciation and the timing of equipment purchases. The American Taxpayer Relief Act, passed by Congress as part of the end-of-year fiscal cliff negotiations, extended both Tax Code Section 179 small business expensing and 50 percent bonus depreciation through 2013. The Section 179 dollar limit for 2013 is $500,000 with a $2 million investment. To be eligible for bonus depreciation, qualified property must be depreciable under the Modified Accelerated Cost Recovery System and have a recovery period of 20 years or less. Property qualifying under Section 179 may be used or new, while bonus depreciation has a first-use requirement.
The timing of equipment purchases can also yield significant tax savings. Section 179 expensing applies no matter when in the year the equipment is purchased, so if you buy the equipment at the end of the prior year, you can take the deduction on the current year’s tax return. Using depreciation, you usually claim six months for the first year, regardless of when the equipment is put into operation. However, if 40 percent of the business’ purchases fall in the last quarter of the tax year, the rules change. The bottom line is that if a business is planning one or more major purchases, when the equipment is purchased can significantly affect the tax bill. Tax professionals can present you with your best options.
Finally, state and local tax laws are constantly changing. Entrepreneurs can sometimes make an equipment purchase free of state and local taxes or they can take advantage of state tax incentives such as a state income tax credit or a possible property tax exemption. Professional tax advisers know the current laws and can make specific recommendations to maximize the benefits for your business.