Tax considerations influence nearly every decision you make as a business owner.
Although there may be little you can do to avoid the tax consequences of a business decision, it's helpful to understand the tax ramifications of your decision before it's time to file your return.
But when it comes equipment purchases, your buying decisions directly impact your end-of-year tax obligation. In fact, the manner in which you acquire business equipment can even determine whether you can deduct the full amount in the current year or spread your deductions out over multiple tax periods, potentially pushing you into a higher tax bracket for the current year.
Business equipment deductions are not intuitive – you'll need to conduct thorough research and consult your tax preparer to fully comply with tax codes. Nonetheless, here are some issues that are on the table when you evaluate the deductibility of business equipment purchases.
When it comes to business equipment deductions, Section 179 is a business owner's best friend. Under Section 179 rules, small businesses can deduct up to $10,000 of equipment purchase expenses in a single tax year. Not a bad deal – but Section 179 does come with certain restrictions and limitations. In order to take this deduction, your business needs to be profitable. If you don't report at least $10,000 of net income for the current tax year, your deduction will be limited. The amount of the deduction is also reduced (dollar for dollar) by the total amount of yearly equipment purchases in excess of $200,000. So if your company spent $202,000 on equipment this year, you only qualify for an $8,000 Section 179 deduction. Be aware that recent legislation has dramatically increased the limits for 2010 and 2011, so you'll need to visit irs.gov for the most current Section 179 program caps.
Any equipment purchases that can't be deducted with Section 179 need to depreciated and deducted over a multiyear time period. Since different types of equipment are depreciated according to different depreciation schedules and the IRS takes into account the timing of the purchase, you'll need to take a closer look at specific assets before you make firm plans to recoup part of the cost through a depreciation deduction.
Leasing vs. Buying
There are many reasons why a business owner may elect to lease rather than buy new equipment. But from a tax perspective, lease payments are fully deductible in the current tax year. This could be a benefit if an asset's depreciable value is less than the total of annual lease payments. But if you could have otherwise deducted the purchase as a Section 179 expense, a lease will restrict the amount you can deduct this year.