Turf Magazine - September, 2012
Kiss Nice Equipment Tax Break Goodbye
Now might be the best time to buy equipment as IRS provisions allowing for steep depreciating schedules expire at year's end
All things being equal, you'd rather be in the seat of your commercial mower, but you're not only a landscaper and lawn care professional, you're a business owner, too. Climb down from that seat because you've got decisions to make.
As every small businessperson knows only too well, it's not enough to be good at what you do. You've also got to multitask as you learn to be part accountant, part attorney, part psychologist and part missionary in order to run a successful landscape business. So, as you are out maintaining the yards of your clients, consider this: it may be the opportune time to buy a new piece of equipment. Be advised, though, that time is running out fast.
If you're 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 accountant.
Together, the Jobs Act and section 179 can make purchasing new and used capital equipment more affordable than ever before. However, the provisions allowing for these steep depreciation schedules are about to expire, and they're set to disappear after Dec. 31, 2012.
Do the math
Here's a quick primer: Say you want to buy a piece of equipment to expand your business services. The selling price is $150,000. Here's how the new law and section 179 can make a difference to your bottom line:
Cost of machinery = $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 equipment = $50,960
Lower cost on equipment = $99,040
*assuming 35 percent tax bracket
In the above example, the original expense of the equipment ($150,000) is dramatically reduced by $50,960. Sound too good to be true? Maybe.
A number of factors will determine how section 179 purchases will affect the cost saving to your business. Always check with your accountant before purchasing capital equipment, as they can provide you exact information on how large purchases can be expensed and might affect your bottom line.
One size does not fit all
The largest single determinant as to how much your business might save on a capital purchase is how the company is set up 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 business are formed under a Sole Proprietorship and after a time incorporate under an LLC or Chapter "S" where their 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're single. Your federal income tax rate is about 33 percent. Same income and married and your 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, let's 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 recent recession. The many provisions within, including the establishment of a $30 billion fund for loans under the (SBA) Small Business Administration (see Turf magazine article at www.turfmagazine.com/article-8183.aspx) are too broad to discuss here. Essentially, however, the law was designed to stimulate the economy, and as every good landscaper 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 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 equipment, including equipment, software, vehicles and (in some cases) real estate.
Too good to be true?
Some of that savings from buying that large piece of construction equipment 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 that we're using, the increase in personal tax is more than offset by the net savings in purchasing the equipment - substantially more. So, 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 provisions of this new law and section 179, it may be possible that your lease cost will be lower than your deduction.
The IRS publishes the types of items that may be depreciated under section 179:
1. Tangible personal property, including your new piece of equipment.
2. 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 in the above property, or a facility used in connection with any of the activities in the above property for the bulk storage of fungible commodities.
3. 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.
4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
5. Off-the-shelf computer software.
6. Tangible personal property, which is any tangible property that is not real property. It includes:
- 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, the article makes certain assumptions that may not hold true for every company. However, in general terms, most service companies that are considering purchasing new or used capital assets would benefit under these parameters. And, the overall effects of these changes will make buying equipment more affordable for most small businesses. But time runs out at the end of this year.
Time to come down from that seat. Maybe you don't really need a backhoe loader or mulch/material blower in your operation yet. Maybe, it's a dump truck or new commercial mower. Whatever it is, it will probably never be more affordable than it is today.
Crest Capital even provides an online calculator at www.crestcapital.com/tax_deduction_calculator to determine your gross savings. All you need to know is the cost of the piece of equipment you're considering.
Keep in mind, time is running out. Talk it over with your accountant of CFO. If you've got the business to warrant some new equipment and you can justify the purchase based on a realistic ROI, there's never been a better time to buy.
Jackie Ingles and her husband, Mike, are freelance writers who live and work in Columbus, Ohio. Contact them at email@example.com.