Hey all, I'm wondering how to think about tool purchases and tax deductions. If i can keep my money in the business and away from the Gmen I'd like to. How do you guys go about calculating a kind of cost benefit when thinking about buying tools for right offs?
tool buying and tax deductions
- Thread starter duburban
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Old School Carpenter
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1. Can you make it pay for itself now or in the future?
2. Will it give you the ability do a job, faster, cleaner or better?
3. Can you still sleep indoors after buying it or do you have a comfortable shop?
4. Can you pay for it outright? ( Never buy a tool on credit)
5. Does it have a sanity benefit? (cheaper than paying a psychologist!)
6. If you don't spend the money will you have to pay it in taxes instead?
Mike
2. Will it give you the ability do a job, faster, cleaner or better?
3. Can you still sleep indoors after buying it or do you have a comfortable shop?
4. Can you pay for it outright? ( Never buy a tool on credit)
5. Does it have a sanity benefit? (cheaper than paying a psychologist!)
6. If you don't spend the money will you have to pay it in taxes instead?
Mike
tiralie
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- Jan 26, 2010
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- 3,617
duburban said:
An interesting question. If number 6. on "oldschools" list is a problem you are lucky, hire a good accountant.
For significant tool expenditures, I do a cost benefit analysis. Some formal, some back of the envelope.
Any capital outlay (equipment) involves increasing fixed and variable costs which includes taxes,and depreciated cash flow. I calculate these to the best of my ability before buying. If the total costs (including write offs) of owning and running the equipment is going to force me to change my customer focus, I will seriously think about not making that purchase.
I used to hate paying tax. Period. But, in reality focusing on taxes, or avoidance of taxes wasted a lot of my time and emotional energy. I should have focused on what kind of customers I wanted.
Because taxes are always there no matter what, I really try to focus on building a business rather than trying to avoid the inevitable.
I know it's not what you mean but I don't buy tools for the write off. It's not an incentive.
I buy tools based on business strategy, the strategy is dictated by the kinds of customers I want to serve. If I need a tool to accomplish a task to serve my customer, but the business cannot sustain the purchase of the tool and the infrastructure to support it, then I find another tool or solution. I will not change my business (strategy) to pay for the purchase of a tool.
I am not building a business so I can buy tools, I am buying tools so I can deliver the best product to my clients.
If a tool has significant cost >$10,000 the (infrastructure) additional overhead (power, real estate, safety, insurance training, etc.) displaces the original capital outlay by a significant factor so the cost of tools while not insignificant is only the tip of the iceberg. Having the right revenue to support the infrastructure to serve the clients and customers I want is more important than the write off
Tim
Good advice here.
talk to an accountant about the tax code, they make it insanely complicated so they can more penalize the little guy.
would you buy a house for the tax break, or for the other benefits?
would you have a kid for the tax deduction or would you have a kid because you wanted to be a parent?
talk to an accountant about the tax code, they make it insanely complicated so they can more penalize the little guy.
would you buy a house for the tax break, or for the other benefits?
would you have a kid for the tax deduction or would you have a kid because you wanted to be a parent?
R
Rob Z
Guest
Duburban,
The property taxes due to your state and/or local gov't will be one thing. Here in VA, property taxes on business assets (trucks, tools, furniture, computers, etc) are due to the county or city where the business is located.
For the Feds, you can either expense the cost of a tool or depreciate it over some period of time. I've always let the CPA do what he thinks should be done so I can't say much about this. Expensing or depreciating tools will lower your income tax but you have to spend a lot of money to save a little money on tax.
I personally think it's a mistake to buy something for the business solely based on (legally) avoiding income tax. I think buying a tool, truck etc should be done if it makes money for the business, makes life at work easier, or allows the business to tackle new jobs that otherwise weren't an option.
The property taxes due to your state and/or local gov't will be one thing. Here in VA, property taxes on business assets (trucks, tools, furniture, computers, etc) are due to the county or city where the business is located.
For the Feds, you can either expense the cost of a tool or depreciate it over some period of time. I've always let the CPA do what he thinks should be done so I can't say much about this. Expensing or depreciating tools will lower your income tax but you have to spend a lot of money to save a little money on tax.
I personally think it's a mistake to buy something for the business solely based on (legally) avoiding income tax. I think buying a tool, truck etc should be done if it makes money for the business, makes life at work easier, or allows the business to tackle new jobs that otherwise weren't an option.
Another option that is not really talked among carpenters is to put the money someplace it will work for you. whether its some sort of retirement, or savings account etc.
Save it for leaner days, in the early 90's in my hometown my uncle was the only developer that did not file bankruptcy.
Rob Z is right on.
Save it for leaner days, in the early 90's in my hometown my uncle was the only developer that did not file bankruptcy.
Rob Z is right on.
Jalvis
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- Jan 24, 2012
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- 348
Tim has a good Handle on how to think about tool purchases. Deductions aren't 'incentives' for purchases just an added benefit.
Each state is different regarding this topic but one thing to mention that hasn't been brought up yet is taking a 'loss' in the business.
In Idaho a business can a take a "loss" for the first five years before its no longer considered a business but a "hobby." This is to the advantage of small startups since theres some good tax benefits. My wife's an accountant so I dont really know all the ins-and-outs so you will have to look deeper.
If you're at the beginning of starting your business then you really should be taking a loss which means your buying equipment with profits rather than taking distributions.
If your looking for a good deduction than 'continued education' is a category to look into. For example I make sure I attend a JLC or construction show each year. All the costs such as flights, meals, and classes are strong deductions for the year but the real benefits come in the form of the knowledge and motivation gained at a LIVE event.
Each state is different regarding this topic but one thing to mention that hasn't been brought up yet is taking a 'loss' in the business.
In Idaho a business can a take a "loss" for the first five years before its no longer considered a business but a "hobby." This is to the advantage of small startups since theres some good tax benefits. My wife's an accountant so I dont really know all the ins-and-outs so you will have to look deeper.
If you're at the beginning of starting your business then you really should be taking a loss which means your buying equipment with profits rather than taking distributions.
If your looking for a good deduction than 'continued education' is a category to look into. For example I make sure I attend a JLC or construction show each year. All the costs such as flights, meals, and classes are strong deductions for the year but the real benefits come in the form of the knowledge and motivation gained at a LIVE event.
R
Rob Z
Guest
One way that might make sense to consider tax implications is if you need to buy a vehicle or equipment that qualifies for a section 179 deduction. Section 179 allows for a large write-off rather than depreciation for equipment or vehicles that otherwise would have to be placed on a schedule.
This might be an option if, for example, there is a year when your business generates more income than it usually does, and you need a particular vehicle or piece of equipment.
This might be an option if, for example, there is a year when your business generates more income than it usually does, and you need a particular vehicle or piece of equipment.
