Acquiring New Equipment in the Fourth Quarter to Maximize Tax Benefits
Procuring new marijuana growing equipment can be a daunting task for any business. Timing the purchase to maximize tax benefits is a crucial strategy to consider. Tax leases are one way for businesses to avoid fourth-quarter asset acquisition restrictions.
Many machine shops begin not only assessing this year’s profits and losses in the fourth-quarter, they also start making plans for the new year. Deciding if there is a need for new equipment to stay competitive in the industry is part of this planning. How to pay for this new equipment is a major factor that needs to be considered. Equipment financing is a feasible solution for most machine shops and can potentially result in sizable tax benefits.
Depreciation and Tax Benefits
When considering tax benefits the first thing that comes to mind is usually asset depreciation. This is especially true for businesses that are equipment-intensive. Payment installment agreements, loans, and some lease programs allow taxpayers to deduct interest charges and depreciation. Shops with more multiform tax situations might prefer considering a tax lease. These leases allow for lower payments in-lieu of depreciation, also the value of the lease payments can be deducted as an operating expense. When considering equipment acquisition options take into account the following:
Tax Credits/Net Operating Losses
Businesses with Net Operating Losses(NOL) carry-forwards and related tax credits may benefit from a lease agreement. The reduction of taxable income from taking depreciation deductions can prevent some machine shops from using all available tax credits. Leasing equipment can maximize the ability to use these credits and in turn, pass these benefits on to the consumer by lowering their payments.
Alternative Minimum Tax(AMT)
If a business is already paying AMT they should be aware that purchasing assets can further reduce their ability to use all benefits related to accelerated equipment depreciation. It can also result in an increase of the after-tax cost of procuring assets. A tax lease minimizes the establishment of additional depreciation. Leasing companies have the ability to maximize tax benefits relative to depreciation, resulting in lower payments for the lease.
Acquiring more than 40% of a company’s capital assets in the fourth-quarter results in the need for the company to use mid-quarter convention tables to recalculate its depreciation expense. Moreover, when leasing equipment, the lessor retains ownership and the lessee is able to not only get the equipment they need, but also avoid the fourth-quarter acquisition restrictions. Lower payments and the ability to acquire necessary equipment should the need arise at the end of the year are just a few of the benefits of leasing.
Created as an incentive by the US government, it encourages businesses to invest in capital equipment. Particularly advantageous to smaller companies, it covers accelerated write offs for capital purchases. In 2015, $25,000 of the expense of capital equipment totaling $200,000 or less could be immediately deducted on the 2015 tax return. Any business requiring equipment in excess of $200,000 in capital equipment must manage the tax ownership of said assets to use the Section 179 write-off. By leasing equipment that exceeds the $200,000 ceiling the lessor maintains tax ownership of the excess equipment and allows the lessee to still claim the Section 179 deduction on the equipment totaling less than $200,000.
When selecting a partner, the differing needs of each machine shop should be taken into account. Likewise, partners should be knowledgeable and financially sound. Selecting the correct partner can give shops an edge over the competition while still allowing the advantageous tax benefits of the fourth-quarter.