“Should I make major business purchases before year-end?” is a common question I get this time of year. It’s partly due to the larger buying frenzy of Black Friday, Cyber Monday, and ceaseless ads from retailers of every type. But a lot of business owners have also heard that making major business purchases before the end of the year is a way to lower the year’s tax bill.
As with most business-related questions, the answer is “it depends”. Here’s a few things to consider if you’re thinking of making a major purchase for your business in December:
How will the proposed purchase affect your income and/or costs? Every business purchase should be evaluated against this standard—will it bring more money in, or result in spending less? Sometimes the benefit is obvious—you need a bigger trailer because you have a waiting list of people wanting to be pay you to haul their horses to shows. Sometimes it’s a bit more of a gamble—is the current truck worth fixing, or are we better off replacing it? Is a bigger tractor going to save enough time to justify its cost, or should we contract out the few things the smaller tractor can’t handle?
Is the business on track to make enough profit to benefit from an accelerated purchase? The main way that a last-minute purchase can reduce your business tax bill is through Section 179 expensing and accelerated or bonus depreciation. These only work to the extent there’s taxable profits to be offset. That’s why the Almost Year-End Horse Business Checkup (https://stablebooks.com/2016/10/31/almost-year-end-horse-business-checkup/) is important.
Does the business have enough cash flow to afford the purchase? Is there enough cash in reserve to pay the full cost? If not, can you finance the purchase on satisfactory terms? Does the business generate enough free cash each month to make the payments without distress? Is that still true if business drops off 20%? The excitement of zero down can blind you to the reality of making a 2, 5, or 20 year commitment to send money to the finance company every single month.
Do you have time to place the item “in service” before year-end? For most asset purchases, it’s not enough that you signed the paperwork, or even took delivery, this year. The deduction is triggered when it gets “placed in service” which is IRS-speak for when you have it all set up and start actually using it in the business. If it’s still in transit, sitting in the box, or missing a key component, on December 31, it’s not deductible till next year.
Does the purchase make sense in terms of your long-term goals and priorities? In the excitement of sales, savings, and feeling like you’ve scored a bargain, it’s easy to make purchases that lead to buyer’s remorse in January.
If you have a hard time separating emotion from the buying experience, our Controller services can help you evaluate your options objectively and reach a decision that makes the most sense for you and your business.