If you were thinking about making a new equipment purchase soon, the best timing could be right now.
While engineering has been my life’s work, accounting was my formal training. That’s why this time of year I’m thinking about tax season even though the filing date is still months away. As 2016 comes to an end, now is the time to make equipment and/or materials purchases if you want those to be factored into your taxes come April.
Tax issues are not at the top of the list for most of the year as many of us are simply trying to make a buck and pay our bills. But taxes should be top of mind in December, particularly if you are showing and projecting a profit for the year. As we all know, the more you make, the higher the tax rate. So let’s explore what tax does to the cost of equipment you may purchase this tax year and pay for part of it with tax savings. If you made enough money that your tax rate is 15 percent, every dollar you’ve earned has to be paid in tax to the IRS at that 15 percent rate. If you can reduce your net taxable income by purchasing equipment or materials, you will offset the purchase price by the equivalent tax savings. For example, if you make a $30,000 purchase before the end of the year, you will pay $30,000 to your vendor and gain back $4,500 in a reduced tax bill. If you are lucky enough to be in a 30 percent tax bracket, that savings in tax would be $9,000, meaning your purchase of $30,000 would only cost you $21,000 in actual cash outlay. Why? If I reduce my tax bill by $9,000 that I don’t have to pay the IRS, I’ve effectively bought $30,000 worth of equipment for only $21,000.
Now, before you go off the deep end and spend all the money you’ve made this past year to save tax, check with your accountant to determine the impact. You can make yourself cash poor and potentially broke if you go overboard. That said, consider what purchases could increase your bottom line, what equipment you currently have that needs replacement, and what expansion could benefit your business. Buying for the sake of saving tax isn’t a good business plan, but buying things that make sense is a good reason to invest and save tax. And don’t buy the most expensive piece of equipment just because it saves more tax. Buy value.
About the Author
John Heisler is the owner of Pipe Lining Supply and Quik-Lining Systems Inc. He has 20 years of experience in the CIPP lining industry and over 40 years in the underground construction industry.