5 Things to Know for Year-End and Section 179 Planning
Year-end is quickly approaching. Whether your business focus is roadbuilding or utility, agriculture or tree care, now is the time for strategic planning and decisions that affect this year, next, and even further down the road. One of the biggest and potentially smartest areas to explore is Section 179.
You’re probably very familiar with the basics of Section 179. But remember last year, when Section 179 wasn’t offered until it was officially signed on December 15? That’s not the case this year, and there is plenty of time to plan and make Section 179 work for you yet this year.
If your business is considering a year-end purchase to apply Section 179, review the following five areas to make the most sound business decision.
1. Know the Facts
For those who may not have taken advantage last year due to the last-minute nature of the approval, a few very basic reminders about Section 179.
First, and most important, the program is designed for tangible, movable items. Additional farm land or a new office building for a growing company headquarters might be a worthwhile purchase right now, but it won’t qualify for Section 179 deduction.
Second, Section 179 is applicable on both used machines purchased by a company and leased equipment, in addition to purchase of new equipment.
Third, bonus depreciation, however, cannot be applied to used equipment. Those planning to apply bonus depreciation to new equipment should keep in mind that the rules for it have changed. Right now, bonus depreciation is available at 50% through 2017. Bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
2. Know the Past
When considering a purchase, look at an existing fleet. Older equipment that has already depreciated can be upgraded, and the Section 179 deduction applied to the trade difference.
Also, consider equipment purchases already made this calendar year. If any were done with the intent to apply Section 179, the deduction may already be used to its full potential and it might be wise to wait until early next year to make a new purchase.
That being said, it still might be a good decision to make a purchase. Equipment seekers can take advantage of lower prices many dealerships are offering this time of year, at price points that might not be offered in the New Year and enough to make up for the loss of Section 179 deduction.
3. Know the Future
Not only does a company’s past need to be reviewed when considering end-of-year decisions, it’s equally important to look ahead.
For example, a business in a lower tax bracket now, but looking to grow in 2017 might want to hold off on deducting all or a portion of Section 179 until next year.
On a related note, Section 179 is intended to be an incentive to help small businesses. Under the new policy, a spending cap of 2.5 million has been applied to Section 179; once a company hits that amount, purchases become no longer eligible for Section 179 deductions.
2 million is the other important number to know. When a company reaches the 2 million-dollar mark in purchases, the deduction is phased out dollar for dollar. For example, a company that spends 2.1 million may deduct 400,000, a company that spends 2.2 million may deduct 300,000, and so on until the 2.5 million dollar cap is reached.
These types of strategic, planned decisions require a deeper dive into trends, forecasting, and future goals for a company.
4. Know What You Need – And Don’t Need
With all the focus on year-end decisions and Section 179, remember that even though it’s offered, it might not be the right decision for every business. There’s a saying in the retail world, “Don’t go broke saving money.” Just as coupons and discounts attract shoppers to products they don’t really need, deductions and money-saving opportunities may distract a business from its true goals.
That’s not to say an equipment purchase still isn’t the best decision. As mentioned earlier, most dealerships offer great prices on equipment this time of year, and that includes used machines and lease options. If a brand new item isn’t affordable but a new addition to the fleet is needed, used equipment is a great route. Similarly, a company unsure if a new machine is really needed could take advantage of low lease offers right now and use that as a test to see if that piece of equipment would offer ROI if purchased down the road.
Leased equipment poses another interesting opportunity. In some cases, leased equipment might be the most profitable option for utilizing Section 179. A deduction can be taken on the full amount of the leased machine; an amount that likely exceeds the payments made in a year on it – meaning the deduction actually ends up as profit.
5. Know Your Partner
Every company looking to make an equipment purchase needs a trusted team – an equipment dealership and account manager. This is perhaps the most crucial part of the equipment buying journey.
A good company cares about relationships and being a partner to a business, not selling the most expensive machines. The experts at a dealership will help every business owner ensure a purchase is the right decision, then assist in finding the right machine to fit needs.
Furthermore, purchasing from a reputable dealership ensures service and support will continue, long after the sale.
While the team at a trusted dealership will no doubt have your best interest in mind, it’s important to note these people are equipment experts – not tax experts. Although Section 179 isn’t a mysterious or complicated tax code, and its concept is quite simple, all business owners should still consult their accountant or trusted tax advisor before deciding to utilize the incentive. Additional information on Section 179 can be found at section179.org.
Interested in taking advantage of Section 179 this year? Contact our team to get in touch with an equipment expert who can help you.
About The Author
Mark Kreps is Vice President of Agriculture Sales with RDO Equipment Co. and based in Moorhead, MN.
For more information on Section 179 and utilizing this tax incentive on new, used, or leased equipment, contact your local RDO Equipment Co. store.