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Equipment Financing and Maximizing Your Tax Savings
SO YOU'RE IN THE MARKET FOR NEW EQUIPMENT AND YOU ARE WONDERING just how will this affect you come tax time. Well, the good news is, due to the 2003 Jobs and Growth Act there are some significant changes that may positively impact your tax bill and, quite frankly, possibly let Uncle Sam pick up part of the cost for your new equipment.
First of all, this information is provided for general reference only and does constitute as tax advice. I strongly advise you to contact your accountant or tax advisor regarding how these significant changes can truly affect your bottom line.
"Our sales have significantly improved over last year, and there is a lot of interest in buying before the end of the year," said Deb Nealis of Lewis Utility Truck Sales, Inc., a dealer in bucket trucks and chip trailers as well as other forestry equipment. "I have to believe the tax savings is certainly a major reason for the increase."
Let's take a look at some of the major changes that have occurred with the 2003 Jobs and Growth Act. The first significant change that we need to look at is section 179 of the Internal Revenue Code. In the past, you have been able to expense up to $25,000 a year in equipment purchased during the calendar year. The 2003 Jobs and Growth Act increased that amount to $100,000. This deduction is effective for purchases beginning January 1, 2003 and prior to January 1, 2006. For a lot of companies, this means they can expense all the equipment they purchase in the year that they acquire it.
| Equipment Cost |
$130,000 |
| Section 179 |
$100,000 |
| 50% Bonus Depreciation |
$15,000 |
| 20% First Year Depreciation |
$3,000 |
| Total |
$118,000 |
| Future Years Depreciation |
$12,000 |
There is more good news if your company needs to acquire more than $100,000 of equipment. The Act has added a 50 percent bonus depreciation for the first year. This bonus provision allows taxpayers to claim an additional first year depreciation allowance equal to 50 percent of the adjusted basis of qualified property. Qualified property is tangible personal property with a modified accelerated cost recovery system (MACRS) recovery period of 20 years or less. This additional 50 percent bonus depreciation can be taken for equipment placed in service after May 5, 2003 and before January 1, 2005, provided that no written binding contract to acquire such property was in effect before May 5, 2003. This bonus depreciation is taken after section 179. In addition, there is a standard 20 percent first year depreciation of any remaining equipment placed in service.
"Our factory is working twelve hour shifts five days a week to keep up with the demand," said Richard Goforth of Southco Industries, Inc., a manufacturer of custom truck bodies for the forestry industry. "Our increased production is only exceeded by the demand. Sales this year are considerably ahead of last year's numbers. I know a lot of our customers are taking advantage of the 2003 Jobs and Growth Act."
What does all this mean? Let's take a look at it as if you were going to acquire a piece or package of equipment totaling $130,000. Under Section 179 we would be able to expense the first $100,000. With the 50 percent bonus depreciation enacted in the 2003 Jobs and Growth Act, we can take an additional 50 percent bonus of the remaining balance. Fifty percent of the remaining $30,000 is $15,000. Under the 20 percent first year depreciation as allowed under IRS rules, you would take 20 percent of the remaining $15,000, which is $3,000. Our total tax deduction on the $130,000 of equipment purchased or financed would be $118,000 in the year it was acquired.
Now let's look at how this affects your tax bill in April. Let's assume that you have a profit after all of your normal expenses, labor, rent, supplies, etc. of $120,000. With the deduction of $118,000, your taxable income would be reduced to $2,000. This allows you to write off most of the profit that year, leaving you a nominal tax payment due on April 15. If you were in the 35 percent tax bracket, you would have saved $41,300. Instead of paying Uncle Sam, you could use your tax savings to pay off $41,300 of the equipment that you purchased that year. The good news is, under that scenario, there is still an additional $12,000 to be depreciated in future years.
What really makes this even more exciting is that you do not have to pay for all the equipment in the year that you acquire it. If you finance it either through a finance/lease program with a dollar buyout or a direct finance through your favorite bank or lending institution, it still qualifies under the provisions of the Tax Act that we have discussed. Even if you only made one payment in the year in which you are taking the deduction, you still could take full advantage of the entire write-off discussed earlier. Yes, if you were to purchase $130,000 worth of equipment and finance it with one payment made during the calendar year, you could write off in the first year $118,000 directly against income, with only the investment of one monthly payment.
With all this said, remember you first have to have income to write off. If your company is enjoying a great 2004 sales year and you are in the need of equipment, I highly recommend that you speak with your accountant or tax advisor regarding this opportunity and then take advantage of these great tax savings, provisions of the 2003 Jobs and Growth Act.
Anthony B. Polito, C.L.P., heads the Green Team for 1 St Priority Acceptance LLC, where he is president. The Green Team has more than 15 years experience serving the Green Industry’s equipment finance needs. You can contact him or Pam Seeker at 330-475-1898.
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