For small business owners, the final two months of the year are a time for reckoning.
Looking back, they assess sales and profitability.
Looking forward, they anticipate future opportunities and new equipment needs.
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With the Section 179 tax deduction, businesses have a strong incentive to purchase and finance their equipment before the new year. Section 179 enables businesses to write off the full value of equipment purchase up to $1 million. To claim this deduction for the 2018 tax year, equipment must be purchased and placed into service by Dec. 31.
Adam Domke and Ryan Anderson are account managers with Stearns Bank's Equipment Finance Division. They have experience working with customers who finance equipment as part of their year-end tax and business planning.
“Now is the time of year when the financial picture becomes clear for most businesses,” Domke says. “With three-quarters of the year over, they have a good idea where they’re sitting financially and their tax liability.”
Anderson agrees: “There is a sense of urgency. The clock is ticking,” he says. “You have the choice of paying taxes, or purchasing new equipment before year end and taking the deduction.”
Purchase and finance before year end
For some types of equipment, inventory shortages have resulted in order backlogs and delays. A strong U.S. economy has created high demand for certain types of construction equipment. So it is especially important to start planning early, so you can order equipment and confirm delivery before year end.
Even if new equipment is backlogged, businesses can purchase used equipment that qualifies for the deduction, Domke says.
“There is a misconception that Section 179 and bonus depreciation apply only to new equipment," he said. "But it also applies to used equipment, or rather ‘new to you.’ ”
Planning for future projects
A construction company may have future projects requiring expanded capacity or specialized equipment. That is a perfect reason to plan ahead, finance today and lock in the tax benefit.
“A home builder should review the projects it has lined up next spring and determine what kind of equipment they will need,” Domke says. “They can save a lot by purchasing and financing the equipment now.”
A firm may have aging equipment with high maintenance and repair costs. Rather than pay for endless repairs, they can purchase new equipment today. Besides a handsome tax deduction, the business benefits from newer, more efficient equipment with lower maintenance costs.
New in 2018
The Tax Cuts and Jobs Act, passed in 2017, made significant changes to Section 179. Most important, the write-off limit was raised from $500,000 to $1 million.
“This enables customers to purchase more equipment and claim a larger deduction,” Anderson says. “Last year a firm may have purchased one machine -- this year they can replace the entire fleet.”
The Section 179 deduction adds an incentive to expand into new lines of service, Anderson says. He worked with a home builder that added spray foam insulation services. The builder researched the opportunity, determined the required investment, and worked with Stearns Bank to finance the equipment. By purchasing before year end, he enjoyed a tax break and now has an additional revenue stream.
Anderson and Domke emphasize that Section 179 is more than just a tax strategy. It should be part of overall business planning.
Start your business planning now so you can purchase, finance and take delivery of equipment before year end. Stearns Bank offers fast pre-approval and an efficient loan documentation process. This helps ensure your equipment purchase and delivery are completed in time to qualify for a 2018 deduction.
“Every business is unique, with its own tax situation,” Anderson says. “Always consult with your accountant.”