Does anyone know of the expected life of the power equipment in our shops? I am filling out a balance sheet and need to determine the depreciation of the equipment. Does the financial life of the equipment last 5 years, 10 years, 15 years, or 20 years. I realize that equipment will last physically as long as we take good care of it, but the accounting world does not see it that way.
Thank you for the help.
putter
Replies
Yikes it's that time of the year already?
I think its five, but I'm not sure. Probably short term, the resturant equipment I'm familier with is anyhow.
You know, accountants are condusive to good sleep.
Edited 2/5/2004 12:46:32 AM ET by Dirt Stirrer
I always depreciate hand tools in 1 year and major tools like table saws, planers, etc in 5 years. It don't make sense to buy cheap hand tools. Buy the best and depreciate them in the year they are bought.
A friend of mine that owns a lawn care buisness depreciates all their tools in 1 year. Mowers, blowers, weed eaters, etc. And to be honest, thats about all the life they get from them!
PlaneWood by Mike_in_Katy (maker of fine sawdust!)
PlaneWood
I am/was an accountant but taxes were not my specialty so don't take this as ABSOLUTE gospel.
On the form 4562 and the instr book that goes with it, there is a section called (?) really sorry but it escapes me now. In any event, this particular quirk in the tax law enables you to take 100% of current years purchases of tools and equiptment up to a fixed amount (used to be many years ago $ 5400 I think). In any event, unless the entire law was recinded, you can write off 100% of costs to current year expenses thus lowering your tax liability. It represents a big potential savings.
I'll hunt around for more info and post again if I get anything that will help.
If you "depreciate" an item in one year it's not depreciation, it's an expense. Depreciation is a method of spreading the cost of an asset over the life of the asset, taking a portion of the cost each year as an expense until the cost is "used up". If it all happens in one year it's not spread out, and thus is not depreciation.
Depreciating faster rather than slower is to your benefit by lowering your taxes sooner rather than later, but there are rules and guidelines limiting how fast you can depreciate an item. Depreciation is faster than the actual life of a true item would be, though. Best to ask you accountant, who can look up the rules.
to follow up on my earlier post, the deduction is called a "section 179 deduction". Will find out what the dollar limit is but at least now we know the law is still on the books.
I looked it up in Google under "Section 179 deduction". Was pleasantly surprised to find that the maximum deduction had gone up to $ 100,000.00 . Items that qualify include : machinery and equiptment, furniture and fixtures and storage facilities.
The only rstrictionis that you must take the deduction in the year it was purchased. If you had big purchases in the past but missed this, it would pay to file amended returns. A "TAX" accountant with a good rep could make it worth your while.
Hope this helps.
Edited 2/5/2004 11:28:37 AM ET by MikeE
Thank you Mike,
I will use 5 years for depreciation. I am doing a project in my finance class and was unsure of using the same number of years as the turf equipment at work. Thank you all for the advice.
Putter
Hi:
This may be a case of too much info but I majored in Finance about a hundred years ago (just seems that way) and a businessman would always take the maximum depreciation allowed. Also, showing the teacher you were hip to Section 179 deductions would, I think, be a plus. Charging up to 100,000 in non cash expenses directly to profit would be the way to go in the real world.
Hope this doesn't sound know-it-all ish. You may have other parameters to work with. Best of luck with the project.
Putter,
If you expect to be making more money in future years where having some additional deductions would be useful to offset the higher taxes on the increased income, depreciate the equipment over time.
If you could use some deductions this year to offset current income and expect to be making more equipment purchases in future years anyway, take the full deduction in the current year and save yourself the trouble of having to keep track of the depreciation year after year.
John W.
I believe that cash expenses can be a deduction, even if leading to a loss, but that depreciation can only be written off to the extent of income. In other words, you cannot use depreciation to create a loss. Just another confusing thought.
AlanAlan
http://www.alanturnerfurnituremaker.com
s4s,
I wasn't thinking about the possibility of creating an actual loss for the year, just reducing taxable income.
I wanted to give some sort of a basic guide for considering whether to depreciate over time or to take the expense all in one year. The discussion went into a lot of fine points about the two possibilities, but nobody offered any basic guidance about the practical (if the word "practical" can ever apply to tax discussions) reasons for choosing either of the two alternatives.
John W.
I just checked with my tax guy for you. You can only take the section 179 deduction to the extent of taxable income. However, what suprised me is that you can carry over the deduction to subsequent years. So instead of depreciating the balance, you can care the deduction forward until you use it up.
Bottom line. Take deductions as fast as you can. There is no reason to delay deductions and pay taxes now instead of in the future assuming you are not going to make quantum leaps up our graduated tax structure.
While this topic is alive..... if a hobbyist who has accumulated a shop full of tools later goes into business, is it possible to declare the cost of the equipment, etc, in any way, even though it was purchased prior to going into business? Someone told me that one way or another it could be done; eg, you could 'sell' your equipment to the business and then deduct it. Anyone know?
It can be done and I believe it is simple, unless they've changed the rules in the last few years.
The tools are listed just the same as if they had been purchased in the current year. The phrase in the tax form directions is, if I remember correctly, to declare the tools either when purchased or when first put into service, the second category covers your situation.
You will,if the IRS ever asks, need to give some sort of proof of their value. Receipts, of course, are the best form of proof but an appraisal can be used. As always it probably pays to check with an accountant or a tax preparer for the fine points.
John W.
That's good news, John. Thanks for the info. Someday maybe I'll turn sawdust into dollars.
Dazz,
As John indicated, done all the time. On the balance sheet it's listed as Assets on the left under Equipment and on the right under the old Owners Equity section (ie. what the business owes you)..
Thanks for the clarification, I'd forgotten to mention that in my original posting. There are way too many nuances in the tax laws and they seem to be getting worse all of the time.
John W.
I am a CPA who has moved on to real estate. Unless it's real simple, I go to some of my friends that are the best resources money can buy. Unless you do it everyday for lot of complex organizations, it is impossible to keep up with. Even the experts specialize in particular sections of the code.
I believe this upping of limits was changed recently. If I remember correctly Bush pushed it through to "help small businesses" in the tax refund bill passed last spring. The idea was to stimulate businesses to make large purchases on machinery and equipment (ie. comp. systems, vehicles, milling and tooling machines, etc.). As a college student and self-employed woodworker (I use that term loosely, I'm more of a carpenter that wishes someday he could do what you all do) I'd have to say I'd rather have back my lower tuition fees and higher financial aid, but that's just me.
Jim
Coventry Woodworking
If the total of expenses were less than $22,000 dollars in one year you can expense them all the first year or up to the amount of depriciation required to offset income whichever is less... rules change over $22,000
This really is where you need a tax expert with experiance in your field to take advantage of the tax laws.. Talk to other shops with similar products and find the most agressive tax guy you can.. his fee is well worth it.. Doing your own taxes at this level is like doing your own brain surgery..
putter
I will have to agree with LostSouth. I would seek the advice of a CPA that specializes in taxes as the rules and regualtions change from year to year. It's a fact!
Every year as I sit in that office with him I am amazed at what changed (last Saturday as a matter of fact). My theory is better safe that sorry. These guys aren't cheap, but neither are goverment tax penalties if you are audited and proven wrong. They will go with you and represent you at an audit. Therefore they make a point of staying abreast of yearly changes because it is money out of their pocket. My CPA pays any penalty if he were to make a mistake. He's never made one either. He gets my vote and a check for my tax return each year.
Trust me, it's worth paying a CPA to get it right the first time. If you have ever had to deal with the IRS on a decrepancy, you know that the money is well spent. Anyone that enjoys their dogmatic attitude is probably a candidate for Prozac! ha.. ha... ha..ha..ha..
Regards..
sarge..jt
Proud member of the : "I Rocked With ToolDoc Club" .... :>)
Putter,
True story..
My closest friend pays twenty times the taxes that I do evan though we are both in a very similar tax position..
The differance is I use a tax guy with decades of experiance in my field and he takes all of the deductions available to me.. and my friend does his taxes himself.. figures he's smart, well educated, literate, and can read instructions so why not save the few hundred dollars..
AMEN!!!
sarge..jtProud member of the : "I Rocked With ToolDoc Club" .... :>)
You know, if the presidential election coincided with tax season, Steve Forbes may have won. Steve
If all you want is the depreciation life, the IRS has a pub on their web site.
It is a bit late to think about last years taxes. You should have started last December.
You can either expense or depreciate your machinery, but neither is often a good choice.
Find a good accountant.
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