As some business owners know, the extremely beneficial tax law that allows for the immediate deduction of equipment and other fixed assets known to many as “Section 179” has been the subject of a significant change in 2014.  The change is actually just a fallback to the historical rules.  The law allows for up to $25,000 worth of most business personal property to be fully deducted in the year of purchase.  Otherwise this property would be deductible through depreciation over a period of time (generally five to fifteen years depending on the property).  In the last several years the government has increased this $25,000 limit to historically high levels in order to stimulate the economy.  For 2013 this limit was $500,000!

The fallback to original limits will inevitably cause the spending practices of business to change just about as dramatically as the change to the deduction limit.  Specifically hard hit businesses are farmers, manufactures, and contractors.  All of these business types, and many others, normally utilize this deduction as a significant part of year-end tax planning and depend on it to help cash flow the expansion of their businesses.  Luckily, some people in the government know this as well and have introduced H.R. 4457 (America’s Small Business Tax Relief Act of 2014) in order to make permanent many of the allowances that were temporarily allowed in the past.  Specifically, many of the 2013 limits would be made permanent which would be a wonderful move toward helping our country’s small business owners grow and prosper.  Unfortunately, this bill has not fully passed yet and we are approaching the end of the year.  You can monitor the status of the bill at this site (https://www.congress.gov/bill/113th-congress/house-bill/4457).

So…how do you as a business owner plan your year-end purchases in this environment?  I have always counseled my client to make asset purchases based on sound business decisions regardless of the tax treatment.  Obviously, a beneficial tax allowance can swing a decision, but a purchase should never be made if strictly motivated by tax benefits.  A $45,000 piece of machinery which is not needed is still a huge waste of money regardless of the fact that a nice tax deduction was realized in the year of purchase.  With this in mind, you should feel comfortable making your personal property purchases regardless of the tax treatment.  You can also utilize financing options to time the cash flows related to your purchase with the allowed tax deduction.  In other words, if you are allowed as a deduction 100% of the purchase price of the asset, then it can make sense to simply pay cash for the purchase and move on.  However, if you will only receive a deduction of 5-10% of the purchase then it may make sense to pay 5-10% as a down payment on the purchase and finance the remainder.  In the following years a deduction for depreciation can generally be achieved in an amount similar to the payments that are made on the loan.  Obviously, interest expense and a couple of other concerns need to be address in this scenario as well, but this strategy helps to time the cash flow out of your business with the tax deduction allowed for a given year.

Sound complicated? It can be…but we can help. If you’d like to discuss how this may be applicable to you, please feel free to give me a call or post a comment on my blog.

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