Under the Modified Accelerated Cost Recovery System (MACRS), “the book” is to buy equipment late in the year in order to claim a half-year’s deduction. However, your situation may call for drastic measures.
Strategy: Replace worn-out or obsolete equipment right now. If you load up on such purchases early in the year—and purposely “flunk” a tax-law test later on—you’ll come out ahead.
Here’s the story: Normally, business assets (other than real estate) that you buy are treated as if they were placed in service halfway through the year, regardless of when that actually occurs. That’s commonly called the “half-year convention” in tax lingo. For five-year MACRS assets, the first-year write-off is 20 percent of the cost; it’s 14.29 percent for seven-year assets.
For instance, since computers are five-year assets, if you buy a $5,000 computer and place it in service in December, you normally can write off $1,000 of depreciation (20 percent).
But there’s another wrinkle: If the cost of assets placed in service during the last quarter of the year exceeds 40 percent of total assets for the year, depreciation deductions are figured under the “mid-quarter convention.”
In other words, the computer would be treated as if it had been placed in service midway through the last quarter. Using the IRS tables for the mid-quarter convention, your for the PC is reduced to just $250 (5 percent times $5,000).
Usually, business owners will buy just enough equipment before the fourth quarter to avoid this tax trap. However, if you need to replace equipment early in the year, you can trigger the mid-quarter convention on purpose. Sound crazy? Like a fox.
Example: Early bird gets the worm
Say your company needs $20,000 in computer equipment, so you buy it in February. The only other asset you expect to buy this year is a $15,000 machine that is a seven-year MACRS asset.
In the usual situation, you wouldn’t buy the machine after September because that would exceed 40 percent of all depreciable assets placed in service during the year. And you don’t want to trigger the last-quarter tax trap.
Unconventional advice: Buy the machine after September and place it in service before Jan. 1. Under the mid-quarter convention, the depreciation deductions of $7,000 for the equipment (35 percent times $20,000) and $535 for the machine (3.57 percent times $15,000) add up to $7,535.
Conversely, with the half-year convention, the first-year deductions would have totaled $6,144. That’s $4,000 for the computer equipment (20 percent times $20,000) and $2,144 for the machine (14.29 percent times $15,000). That equals $1,391 less than the deduction you can claim using the unconventional strategy.
Final tip: If your plans go awry before the end of the year, you can fall back on the expensing deduction to bail you out. For 2006, the maximum deduction allowed is $108,000, regardless of the time of year any of the equipment is placed in service.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/7140/need-new-equipment-flip-buying-strategy-on-its-head "