Tax
Incentives for Purchases
As you plan your equipment purchases, keep in mind that Uncle
Sam will help you out by letting you deduct some or all of the
equipment's cost on your federal income tax return. Your state
tax agency may also provide some tax-saving incentives.
Expensing election. Perhaps the biggest tax incentive
that's available is your ability to elect to immediately expense
(deduct in the current year) the cost of certain equipment you
purchase for use in your business. In other words, rather than
having to recover the cost for tax purposes over several years
via depreciation deductions, you can recover all or a portion of
the cost on your return for the year that you start using the
equipment in your business. In general, you can expense up to
$24,000 in equipment costs for purchases in 2001 and 2002 and
$25,000 for 2003.)
If the equipment is a passenger car, computer, or related
peripheral equipment, cellular telephone or similar
telecommunications equipment, T.V., camera, or stereo equipment,
you can't elect to expense the cost of such item (termed
"listed property" for tax purposes) unless more than
50 percent of its use is related to your business.
Accelerated depreciation. For tax purposes, you
account for the equipment costs that you don't or can't elect to
immediately expense through depreciation
deductions. To encourage businesses to invest in equipment
and other business assets, current federal tax law permits you
to claim a greater percentage of an item's cost as depreciation
deductions during the earlier years of the item's use.
For example, for equipment like computers that the law
assumes has a five-year useful life, you can claim a first year
deduction of up to 20 percent of the item's cost, and a second
year deduction of up to 32 percent of the cost.
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Save Money
Properly planning the timing of your
equipment purchases can produce significant tax
savings. For example, the equipment expensing
election applies whether you purchase and start
using a given piece of equipment during the
first month of your tax year, or the last month.
So, if towards the end of your tax year
you're contemplating a purchase of equipment,
you may do well to complete the purchase and
start using the equipment before the end of the
year if you can benefit from deducting the
equipment's cost on your current year's tax
return.
Timing is also important for depreciation
purposes. For the first year that you use an
item in your business, you'll usually be allowed
to claim six-month's worth of depreciation,
regardless of when you actually start using the
item. For this reason, there is some benefit to
delaying your purchases until the last half of
your tax year. However, you don't want to wait
too long because if more than 40 percent of your
purchases fall in the last quarter of your tax
year, the rules change. The MACRS deduction for
property is subject to the "midquarter
convention." In English that means that if
you place an asset into use in during the year,
you compute the full year's depreciation and
then multiply it by the following percentages,
depending on which quarter it was placed in
service: First quarter-87.5%, Second
quarter-62.5%, Third quarter-37.5% and Fourth
quarter-12.5%. Consult your tax advisor for
further details as this can get very
complicated.
If you're planning one or more major
purchases, we suggest you have your accountant
"run the numbers" so you can see how
different purchase dates can affect your tax
bill.
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State tax incentives. The tax laws of most states
track the federal laws, so you'll get the same expensing
allowance or depreciation deduction on your state tax returns.
You should also be on the lookout for other tax incentives. For
example, your purchase of certain manufacturing machinery may
entitle you to a state income tax credit or a state property tax
exemption. Or, perhaps you'll be allowed to make the purchase
free of state and local sales taxes. Consult a local tax advisor
or your state department of revenue for the most current laws in
your state.
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