To buy or not to buy...another machine? Taxes....

Now I know the general answer would be to do it if I could afford it and keep it running. But I wanted to see if anyone has ever bought a machine for the write off the the next year?

I'm sure others have had this happen so I'm looking to see what others have done. Here is how it went:

Made a decent amount of money last year for a one person shop (as a sole prop), taxes came to roughly $18,000. Luckily, I bought a second machine the year before and was able to write the entire thing off and come to owe zero. My concern comes in when I think about next year since I haven't made any significant purchases. I thought about buying a 3rd machine, have been thinking about it for a while. Payments would be about $1000 or less per month.

Also, will probably change to sub s corp for next year.

Looking for some input from some of you savvy owners.


thanks!

Prototypical said:

see if anyone has ever bought a machine for the write off the the next year?

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The problem with depreciation is the irs decided how long it takes to do. A friggin building for industrial use is 39 years.... whether it will last that long or not. yet an agricultural structure is eligible for bonus depreciation. Now I don't mind the Farmers getting a break, I just think it should extend to industry too. Section 179 machinery deductions are greatly reduced for the 2014 tax year.......

as for your issue, you need an good accountant to tell you how much of your outlay comes off your income.

Never buy a machine JUST for tax deduction. You don't save the entire cost of the machine, just reduce your tax bill. If the machine will increase profits, reduce costs, then consider buying. If you only want a tax deduction, I'll be happy to send you an invoice so you can deduct what you pay me.

Red James said:

Never buy a machine JUST for tax deduction. You don't save the entire cost of the machine, just reduce your tax bill. If the machine will increase profits, reduce costs, then consider buying. If you only want a tax deduction, I'll be happy to send you an invoice so you can deduct what you pay me.

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Yeah, I get it. It just pains me to think of giving the govt. 40% of whatever I make.

Decide how much you think you need to make and work backwards from there. Taxes are just another business expense.

Big B

Prototypical said:

Yeah, I get it. It just pains me to think of giving the govt. 40% of whatever I make.

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WILLEO6709 said:

Section 179 machinery deductions are greatly reduced for the 2014 tax year.......

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From what I found it's back to the original 25,000 for 2014

I just got this from my accountant (CPA):

In order to bring profits down you must spend money. You could do the following:
1) Pay employee bonuses before year end
2) Purchase needed equipment and place it in service by 12/31/14.
3) Postpone sending out A/R invoices at some point in December to assure collection happens in January. (This could make the profit increase for 2015, however).
4) Prepay business expenses by 12/31/14. (This could also make the profit increase for 2015, however).
5) Start a pension plan for all employees. (I think you lost the window of opportunity to start a Simple-IRA or 401K plan...but you may want to consider this for 2015). You can still fund a SEP-IRA, but whatever percentage you fund for yourself, you must also fund that same percentage for all employees. This type of plan can be costly.
6) You could offer some percentage of health insurance coverage for your employees. There are credits available if you pay 50% or more of the employee's health insurance premiums.
7) I could prepare some estimated tax vouchers to increase the federal and state taxes paid for 1/1/15.
If you pay the state tax due by 12/31/14, it is deductible on the federal tax return.

Hopefully this might help.
We are all in the same boat, and #179 does not look good for this year.

Lee (the saw guy)

I tried to do this a couple of years ago, it doesnt really work. I did what these guys told me to do. I hired a book keeper and an accountant and they turned me into an S corp. I write off my building and I pay myself rent. I hired 2 employees and now I dont have to pay so much in taxes. I also bought a new truck an isuzu diesel flatbed. I can write off all the fuel and all the insurance and repairs.

My accountant used to say he has two types of clients. Those who pay too much tax and those who pay too little.....and you do NOT want to be in the latter.

pay the 40% and spend money on things that make good business sense not (perceived) tax benefits

(unless you guys have some crazy one year super acceleration of the capital cost allowance (depreciation))

Help me here guys,,,

Between the accountant and my wife I have had a hard time getting a straight answer...

Say I have to pay the IRS 25,000 in taxes this year. Thats the amount of the check I write and receive nothing back.

IF I buy a machine that costs 24,000 would I be able to reduce the amount of money I send to the IRS by that amount and only send them 1,000 OR will I only be able to deduct my tax rate , say 30%, of that 24,000 and still have to send in 17,800.00

swatkins said:

Help me here guys,,,

Between the accountant and my wife I have had a hard time getting a straight answer...

Say I have to pay the IRS 25,000 in taxes this year. Thats the amount of the check I write and receive nothing back.

IF I buy a machine that costs 24,000 would I be able to reduce the amount of money I send to the IRS by that amount and only send them 1,000 OR will I only be able to deduct my tax rate , say 30%, of that 24,000 and still have to send in 17,800.00

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You've got two choices, go with the accountant, or you need to fire the accountant

its neither though. In financial accounting, the value of an asset is depreciated over its useful life. What that means each year, a bit of it is expensed. say it cost 50,000 and would last 10 years - so each each year you expense say 5000. That means, each your book value of the fixed asset on the balance sheet is reduced by 5000 AND your income (to which a tax rate is applied) is reduced by 5000. If you made say 100,000 profit before tax, instead of being taxed at 100,000 x your tax rate, you'd be taxed at 95,000. IF the tax rate was say 30%, you pay 30% of 95,000 in tax instead of 30% of 100,000 - $28,500 instead of $30,000. Eventually, over the years you'd have gotten to reduced your income before tax by a total of $100,000, the purchase price, and would have reduced tax by $30,000. This is fair and as it should be - businesses pay tax on income, revenue- expenses, and the machine gradually wearing out is an expense.

This is why I often suspect BS if someones saying they're buying capital assets (things that aren't expensed in one year) to reduce taxes

the big BUT is that there is also tax accounting....that isn't always the same as financial accounting. Some jurisdictions allow accelerate rates of depreciation. Finacial accounting rules, trying to accurate reflect the real world, say you expense it over its useful life BUT tax rules allow it to expense over much shorter period (for a greater amount each year). This tax policy can affect decisions if the acceleration is extreme.

btw, the reason for the tax policy is to encourage capital expenditure - investment in new machines for growth and productivity improvements

I suggest reducing your taxable income with a SEP or IRA first. Some day you might want to retire. It seemed just like last week it was not something I would not have thought about. Fortunately I did, and if I was to do it again I would have contributed more.

Then... consider adding a piece of equipment that gives you a service your customers could use. I've never considered using 179 in the 30 years of business. It's really only there for the rich boys. Standard deprecation is to me the way to go.

I don't have a lot of advice in this area, but what I will say is that paying a CPA for 20+ years is cheap compared to a single misfiled IRS return. If you have a good one, they will even save you money.
I don't delve into the taxes any deeper than I have to, working a day job, running a side business, and taking care of my family are more important than reading tax law to save a bit of cash.

Mcgyver said:

its neither though. In financial accounting, the value of an asset is depreciated over its useful life. What that means each year, a bit of it is expensed. say it cost 50,000 and would last 10 years - so each each year you expense say 5000. That means, each your book value of the fixed asset on the balance sheet is reduced by 5000 AND your income (to which a tax rate is applied) is reduced by 5000. If you made say 100,000 profit before tax, instead of being taxed at 100,000 x your tax rate, you'd be taxed at 95,000. IF the tax rate was say 30%, you pay 30% of 95,000 in tax instead of 30% of 100,000 - $28,500 instead of $30,000. Eventually, over the years you'd have gotten to reduced your income before tax by a total of $100,000, the purchase price, and would have reduced tax by $30,000. This is fair and as it should be - businesses pay tax on income, revenue- expenses, and the machine gradually wearing out is an expense.

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I am thinking that this is under the normal tax structure... I was under the impression that the 179 machinery deductions would all you to take off up to 25,000 of the machine in one year. So would I be paying 30% of 0 after the deduction?

Ask your accountant is tooling is a direct expense or if it is depreciated. Maybe you should stock up on inserts as well as some tool holders and machining heads you have put off buying.

If you run your business profitably, you're going to pay taxes. Even buying a new machine might, hopefully, have the effect of improving your profits even further, and you'll have to pay more tax!

Only buy a machine that you need. You still have to pay for the machine with profits you make after taxes.

I have a limited company. It doesn't really save taxes, it just allows you to split the profits (between the company and yourself), but the tax rate might be marginally lower for a corp. However, if your corp saves up a big nest egg, and you decide you want it personally, you'll pay tax again to get your hands on it.

Incorporate so you can write it off next year when sales are down.

swatkins said:

Help me here guys,,,

Between the accountant and my wife I have had a hard time getting a straight answer...

Say I have to pay the IRS 25,000 in taxes this year. Thats the amount of the check I write and receive nothing back.

IF I buy a machine that costs 24,000 would I be able to reduce the amount of money I send to the IRS by that amount and only send them 1,000 OR will I only be able to deduct my tax rate , say 30%, of that 24,000 and still have to send in 17,800.00

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Section 179 allows you to expense up to the limit in a single year, PROVIDED you show that much profit. Expensing it lowers your taxable income by the amount you expense, not the amount of taxes you pay, so your second example is basically correct.

Dennis

swatkins said:

Help me here guys,,,

Between the accountant and my wife I have had a hard time getting a straight answer...

Say I have to pay the IRS 25,000 in taxes this year. Thats the amount of the check I write and receive nothing back.

IF I buy a machine that costs 24,000 would I be able to reduce the amount of money I send to the IRS by that amount and only send them 1,000 OR will I only be able to deduct my tax rate , say 30%, of that 24,000 and still have to send in 17,800.00

Click to expand...

A 179 deduction is just that... a deduction, and not a tax credit. You can deduct it the same as any other expense, and then calculate the tax on whatever is left.

Because a $24K deduction is likely to move most people in normal income ranges into a different marginal tax bracket, you can't really assume the purchase will result in X% tax savings. You have to figure your taxable income with and without that additional deduction, and then see what the tax is in each case to determine the savings.

Someone with $70K taxable without the 179 can take the $24K deduction and it will save them 25% on federal income tax because they're in the 25% bracket before and after the deduction.

OTOH, someone with $40K taxable without the 179 can take the same $24K deduction and they'll save 25% on the first $3100 and 15% on the remainder since their tax rate drops to 15% as soon as the taxable income drops to $36,900.

And then, someone with $450k taxable can take the same deduction and they'll save 39.6% of the $24K in federal tax. But, the first two will also save another 15.3% on self employment tax while the $450K guy is way past the cutoff for SS, so his only additional savings there will be on the Medicare portion of self employment tax which would be 2.35% at that income level.

So the savings on fed income tax plus self employment tax for the $70K guy would total 25% + 15.3% = 40.3% of the $24K, while the $405K guy would save roughly 42% of the $24K. Not a lot of difference there. The $40K guy is going to save about 31% of the $24K, or substantially less than the other two.

All the above to show the necessity of doing the calculation for your own income situation before and after the 179 deduction.

One thing worth mentioning here is that anyone doing work on the side is limited to total deductions equal to the otherwise taxable income generated by the business. IOW, you can't use losses from the side work to offset wages or salary from your regular job. Lots of people try that and it won't fly if the IRS catches it. You can carry the loss forward to offset future income from the side work.

Where people get themselves in trouble with 179 rules that allowed expensing of machinery with 6 figure pricetags in the past few years is the failure to consider that they've used up all the deduction in one year and are now looking at 4 more years of payments on the machine, all of which will be made with taxed income. So, if the machine payment is $2500/mo and the combined state, federal, and self employment tax totals 40%, then it will take $4167 of net income to make that $2500 payment each month for the next 48 months.

OTOH, if the person is in a position to pay cash for the machine then he will be able to realize the full savings on the tax bill in year one, and have no worries thereafter. Of course, if the machine is financed and nets you more than the $4167 each month in actual profits, then it will still pay for itself. But its one of those situations where being overly optimistic can really bite you hard if that perfect set of circumstances doesn't come together as originally imagined.

The ideal situation is to buy for cash toward the end of a year that you know to be very profitable. The machine can't cause any financial squeeze in the future since its paid for, and the tax savings would be maximized due to the high marginal rate. It will be interesting to see if the 179 max for this year may be increased for 2014 before the end of the year, or for next year. Anything retroactive after the first of the year would be doubtful since 2014 would be closed and it would be difficult to sell that as an economic stimulant, but if the Republicans take over the Senate and pass an increase for 2015 thru the congress then there would be a good chance Obama would sign it since he's supported the high 179 deductions in the past.

Thanks guys, better explanations than either the accountant or the wife I think I need to keep remembering the difference between tax deductible and tax credit.

My problem is that everything is paid for, except the shop building / land and there are not many ways I see to really cut the tax bill, over the long term.