Time is running out on equipment tax breaks

As every small businessperson knows all too well, it’s not enough to be good at your profession, you’ve got to multitask and learn to be part accountant, part attorney, part psychologist and part missionary in order to run a successful tree business. So, while you’re up there in a tree, dangling from a rope, your hard hat slipping down over your eyes, don’t be blinded, consider this, it may be the opportune time to buy that new piece of equipment. But time is fast running out.

If you are not yet familiar with The Small Business Jobs and Credit Act of 2010, and in particular its influence on section 179 of the Internal Revenue Tax Code, you probably need to do some reading and talk with your account. Together, the Jobs Act and section 179 can make purchasing new and used capital equipment more affordable for the small businessperson than ever before. However, the provisions allowing for these steep depreciation schedules are about to expire; they will be gone on December 31, 2012.

Here’s a quick primer: Say you want to buy that new crane to expand your business services. The selling price is $150,000. Here is how the new law and section 179 can make a difference to your bottom line:

Cost of machinery (crane) = 150,000

Section 179 deduction =139,000

50 percent Bonus Depreciation deduction = 5,500

Normal first year deduction =1,100

Total first year deductions = 145,600

Cash savings on crane =50,960

Lower cost on crane =99,040

*assuming 35 percent tax bracket

In the above example, the original expense of the crane ($150,000) is dramatically reduced by $50,960.00. Sound too good to be true? Maybe. There are a number of factors that will determine how section 179 purchases will affect the cost saving to your business. Always check with your accountant before purchasing capital equipment; they can provide you exact information on how large purchases can be expensed and might affect your bottom line.

The largest single determinant as to how much your business might save on a capital purchase is how the company is organized under the tax laws. Businesses are organized into five categories for tax purposes: sole proprietorship, partnership, corporation, “S” corporation (chapter “S”) and limited liability company (LLC). Most small businesses are formed under a sole proprietorship and, after a time, incorporate under an LLC or Chapter “S,” where the profits are taxed as ordinary income. Again, these are general terms, your business may be different, but most small businesses pay a federal income tax of less than 35 percent.

For example, say your income before taxes is $170,000 and you are single. Your federal income tax rate is about 33 percent; same income and married, federal income tax is about 30 percent. This is, of course, before personal deductions. For our purposes in discussing how the Jobs Act and section 179 might affect your purchase of capital equipment, I’ll use a flat income tax rate of 35 percent assuming no deductions. This is somewhat higher than the norm, but not so much as to skew the difference dramatically.

The Small Business Jobs and Credit Act of 2010 was created to help small businesses through the deepest recession in 70 years. The many provisions within, including the establishment of a $30 billion fund for loans under the Small Business Administration, are too broad to discuss here, but essentially, the law was designed to stimulate the economy, and as every good arborist knows, the backbone of the U.S. economy is small business.

Section 179 of the Internal Revenue Code has been a part of the business lexicon for a long time. Sometimes referred to disparagingly as the “Hummer Law” because of the many abuses in its initial application, the law has been amended to work under the parameters of the Jobs Act to allow for accelerated depreciation on certain capital expenses including equipment, software, vehicles and, in some cases, real estate.

Too good to be true? Well, maybe.

Some of that savings from buying the crane may be taxed as income. For instance, if the normal depreciation is $1,500 per year, and you take $5,500 as bonus depreciation, the difference (again, depending on the tax structure/business structure) of $4,000 might be taxed as ordinary income at 35 percent or a total cost of $1,400 in increased personal taxes (before deductions). Still, in the example we’re using, the increase in personal tax is more than offset by the net savings in purchasing the crane – substantially more. When considering buying new or used equipment under these conditions speak with your accountant or CFO.

The new law also affects leasing, and, in fact, under these changes leasing can become an unexpected source of income. Historically, the primary reason for a non-tax lease has been to help keep monthly payments for capital equipment lower. Under the provisions of this new law and section 179, it’s possible that your lease cost will be lower than your deduction.

The IRS publishes the types of items that can be depreciated under section 179:

  • Tangible personal property (including your new crane).
  • Other tangible property (except buildings and their structural components) used as:
  • An integral part of manufacturing, production or extraction or of furnishing transportation, communications, electricity, gas, water or sewage disposal services,

A research facility used in connection with any of the activities above, or

A facility used in connection with any of the activities above for the bulk storage of fungible commodities.

  • Single-purpose agricultural (livestock) or horticultural structures. See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures.

Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

  • Off-the-shelf computer software.
  • Tangible personal property. Tangible personal property is any tangible property that is not real property. It includes the following property.
  • Machinery and equipment.
  • Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment and signs.
  • Gasoline storage tanks and pumps at retail service stations.
  • Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals.

The U.S. Tax Code is muddy water for most of us. In attempting to keep this article discernible to non-accountants, it makes certain assumptions that may not hold true for each individual company. However, in general terms, most tree service companies that are considering purchasing new or used capital assets would benefit under these parameters. The overall effects of these changes will make buying equipment much more affordable for most small businesses. But remember, you’ve only got until the end of this year.

Time to come down from that tree. Maybe you don’t need a crane in your operation, maybe it’s a chipper, a boom truck or a stump grinder. Whatever it is, it will probably never be more affordable than it is today. Crest Capital even provides an online calculator (www.crestcapital.com/tax_deduction_calculator) in order to determine your gross savings, all you need to know is the cost of the piece of equipment you’re considering purchasing. Talk it over with your accountant. If you’re in the market for equipment updates, there has never been a better time to buy.

Mike Ingles is a freelancer writer living in Columbus, Ohio, who writes articles about business and the green industry.