Buying Equipment for your Business

Do you buy a lot of equipment for your business? Equipment is any business purchase that should last more than one year. Paper, staples, boxes etc are supplies not equipment. Desks and machinery etc are equipment. Computers may be technologically obsolete when you first plug them in but they are considered equipment because they will physically last for several years.

The IRS requires you to deduct the cost of your equipment over 3 to 7 years rather than all at once. This is called depreciating the equipment. This can present a cash flow problem. You spend $35,000 for a nice fancy piece of equipment and then you get a tax deduction over 7 years. You pay $35,000 but only deduct $5,000 that year. It doesn’t seem fair does it?

There is a special provision in the tax code for small business. You can buy up to $125,000 ($250,000 in 2008) in equipment in a year and write it off in full that year. So in the case sited above the full $35,000 is deductible in the year you bought it. Then next year you can buy more equipment and expense it. That seems fair to me.

There are several hurdles your must clear to take this deduction. If you spend more than $800,000 on equipment in one year, you start to lose the right to expense your equipment that year. $800,000? That doesn’t sound like a small business to me. None of my clients have ever spent that much in one year.

You also cannot take this deduction when you buy real estate. You must depreciate business real estate like an office condominium over 39 years.

The various tax packages you can use to prepare your tax return will handle this very well. However, if you are in business, hiring a tax professional could be a great idea.