Wealth Creation for Small Business Owners by James E. Cheeks

Author:James E. Cheeks
Language: eng
Format: epub
Tags: ebook
Publisher: Adams Business, an imprint of Adams Media,
Published: 2010-07-15T00:00:00+00:00

WEALTH

CREATION

STRATEGY

33

Use Instant Equipment

Writeoffs to Build Wealth

It’s a basic principle of business and tax accounting that a business’s tangible assets—real property and business equipment—decline in value over time. This decline is recognized by periodic depreciation deductions against the asset’s cost as shown on the balance sheet. These deductions reduce business financial and taxable income.

But small businesses get a special tax benefit for equipment purchases. They can often write off—treat as a current expense—the entire cost of an equipment purchase in a single year. The amount “expensed” exempts from income tax an equivalent amount of business income, even when there is no equivalent cash outlay or, indeed, any current outlay. Depreciation generates tax-free income. Expensing does it faster.

CASE STUDY

Gene, who had been leasing delivery vehicles, decides to buy three qualifying vehicles for a total of $75,000, effective July 1. Business income for the year, disregarding these purchases, is $250,000. Expensing these purchases cuts business income by $75,000, saving $24,750 in federal tax costs, and maybe another $6,000 in state tax costs.

The cost expensed is the amount Gene put down in cash to buy the equipment (if anything), plus whatever he borrowed to buy the equipment. So if Gene paid $7,500 down and borrowed the rest, his federal and state tax savings of $30,750 is more than four times his down payment.

If the business is buying the equipment from its owner or co-owner, a close family member of either, or a related business, full writeoff is not allowed.

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