When is the right time to make big purchases for your business? Whether it’s new furniture, equipment, or vehicles, new tax code changes make now an ideal time to make an investment in your business.
New legislation, known as the Protect Americans from Tax Hikes Act (PATH Act), can save your small firm a ton of money on big purchases used for business purposes. Passed in December 2015, the PATH Act was rolled quietly into the 2016 federal government budget and includes several benefits.
Here’s what you need to know:
The Tax Deduction Limit for Big Purchases Has Gone Up
The Section 179 tax deduction has been around for some time. It lets businesses expense the entire cost of equipment purchases in the year they were purchased, as opposed to depreciating the cost over several years. The deduction limit had been substantially reduced before PATH was passed, but starting with tax year 2015, the deduction limit has been increased to $500,000 on purchases up to $2 million in one year.
What purchases qualify? Property that qualifies for the deduction includes business vehicles, computers, office equipment, machinery, off-the-shelf software, printing equipment, laboratory testing equipment, farm equipment, and more—all big purchases. However, be sure to check with your accountant to confirm eligible purchases before you make them.
Depreciate Expensive Purchases Sooner
In addition to the increased Section 179 deductible limit, the PATH Act extends bonus depreciation laws that expired in 2014. Businesses can now recoup the purchase price of expensive, long-term assets that are above the Section 179 deduction limit. In the past, depreciation over time only allowed for the deduction to be taken in stages. Going forward, the first-year bonus depreciation allowance is 50% in 2016 and 2017, 40% in 2018, and 30% in 2019.
Calculate Your Savings
It’s hard to picture the tax savings of these new laws, but they can be substantial. Check out this Section 179 Calculator from financial services firm Balboa Capital to help you realize your total tax savings and net cost of equipment under the new tax changes.
There are many other benefits to small businesses as a result of the PATH Act including an extension of the R&D tax credit, an extension of the 100% exclusion on gains from the sale of stock, and more. Here’s a useful summary of all the provisions of the Act.
Are You Ready to Make a Large Business Purchase?
Tax benefits aside, you’ll still need to examine your books and cash flow situation before making a large purchase. Number crunching or “capital budgeting” can help you understand whether the purchase is worth it based on the anticipated returns. Most accounting software can help you run this kind of analysis.
When it comes to cash flow, consider the immediate cost versus the long-term benefits of the purchase—will it bring in more sales or operational cash savings? Use your cash flow forecast to compare costs and benefits over time and what it means for your finances. This will also help you predict any potential cash shortages and make adjustments accordingly.
Talk to your accountant if you’re still not sure or need a professional opinion on the risks and rewards of making that large purchase. They can also help advise on the tax savings.
Finally, consider your timing. Is there a better time of the month, year, or quarter when sellers try to shift inventory? That could give you a better deal.