Year-End Equipment Purchases: Think Before You Buy
By Alex Reimer, CPA
As year-end approaches, business owners and farmers often start thinking about purchasing equipment to help reduce taxable income. While buying a new piece of equipment can provide a valuable tax deduction through Section 179, bonus depreciation, or regular depreciation, the tax savings shouldn’t be the only reason you decide to make the purchase.
One thing that is important to remember is that when you buy the equipment and when it is actually placed in service can make a difference. Simply paying for a piece of equipment before year-end doesn’t always mean you automatically get the deduction that year. Planning ahead can help avoid purchasing something at the last minute and then finding out the tax treatment isn’t what you expected.
It is also important to look at the bigger picture. Spending $100,000 just to get a tax deduction doesn’t mean you saved $100,000 in taxes. You still spent the money. Before making a large purchase, consider whether you actually need the equipment, how it affects your cash flow, whether you are financing it, and what your overall tax situation looks like.
There are also different ways to depreciate equipment, and the option that gives you the largest deduction today isn’t always the best option long-term. Depending on your income this year and what you expect in future years, it may make more sense to spread some of that deduction out rather than taking as much as possible upfront.
If you’re considering a significant equipment purchase before year-end, talk with your CPA before making the decision. A little planning ahead can help you understand the tax impact and make sure the purchase makes sense for both your business and your overall tax situation.