Are you looking to purchase equipment such as printers, copiers, or office furniture for your business in the near future? If so, you may want to look at the purchases you have already made this year before determining whether to purchase the new equipment this year or next.
By appropriately planning your business purchases, you can save money through tax deductions.
How it works
Typically, when an equipment purchase is made, you depreciate the equipment over a set number of years. You then are only able to deduct the portion that depreciated in the year of purchase. However, under the Section 179 deduction, you can depreciate the full purchase price of the equipment in the year of purchase!
A deduction for businesses called the “Section 179 deduction” allows the business owner to deduct up to $125,000 (2007) of qualified purchases a year. The deduction amount increases to $128,000 for 2008. For tax purposes, you can claim the entire purchase price as depreciation, so there is no need to worry about claiming the appropriate amount of depreciation on future tax returns.
Additionally, if your business is located in a “qualified enterprise zone” or “qualified renewal community property” the amount of the available deduction increases to $160,000. Similarly, if the business is located in the Gulf Opportunity Zone, the deduction amount is greater.
As with most tax deductions, the amount of the deductions decreases as the business income increases. In this case, if the business has made more than $500,000 of equipment purchases, then the amount of the deduction ($125,000 for 2007) is decreased dollar for dollar for the total of the purchases greater then $500,000. For example, if you had $600,000 of equipment purchases, then the total deduction you can take is $25,000. The purchase limit for 2008 increases to $510,000.
Another requirement for the equipment qualifying for this deduction, is that they must be used for business purposes at least 50% of the time.
So….should I make my equipment purchase this year or next???
The main thing to consider is whether you have met the deduction limit for the year. If you must make the equipment purchases this year, you should try and keep your total purchases under $500,000. By purchasing above that amount, you are actually increasing the amount of taxes you will have to pay.
If you haven’t met the $125,000 deduction limit, and it is possible to hold off on purchasing the equipment, then it would be beneficial to make the purchases in the next year. This will allow you to take the full deduction this year and will result in a lower tax bill.
The bottom line is that if you effectively plan for your purchases, then you will be able to lower your tax bill through this deduction.
Very few people use the words fun and taxes together… and don’t worry, I’m not one of them. I hope to make taxes easier to understand and less of a hassle. I am a CPA with a Master’s in Accounting, and I’ll do my best to help explain many of the tax options available today.