Financing The difference between business and family purchases

[Dr_Zinj]

I was snooping over on the Bobcat site and came across this page dealing with tax incentives and depreciation of tractors.

2010 Bonus Depreciation and Section 179 Deductions - Bobcat Company

It finally sunk in how farms can afford those multiple, giant, 2000+ hp workhorses while average joes like me wince at even a single CUT purchase.

 

[TripleR]

You have that and don't pay taxes when you buy the equipment if it is a farm expense.

 

[rjkobbeman]

Normally, a business can only depreciate (deduct) equipment over time. Meaning you can depreciate the cost of equipment over x number of years. Depending on the equipment, x will vary. You cannot depreciate equipment faster than x.

Section 179 changes this up a little. Under section 179, a business can depreciate the entire cost of equipment in one year. This really helps to lower your taxable income. The catch is you have to pay for the equipment all in the same year. This means you cannot depreciate a piece of equipment under section 179 if you have a loan on it. In that case, you would follow the normal depreciation schedule.

Often a business will use a mixture of section 179 and normal depreciation schedules.

What seems to change from year to year is the amount you can deduct and what pieces of equipment you can deduct under section 179.

It "seems" like companies are getting a steal, but they really are just accellerating the depreciation schedule.

Also, you can't use section 179 deductions to create a taxable loss.

I also think you have to keep the equipment in service for its normal depreciation schedule. You can't claim a section 179 deduction for a piece of equipement that normally depreciates over 5 years and then sell it the next year.

 

[smstonypoint]

NThe catch is you have to pay for the equipment all in the same year. This means you cannot depreciate a piece of equipment under section 179 if you have a loan on it.

Huh? Your source for this claim?

Here's a source that says otherwise.

Benefits of Leasing and Loans with Section 179 | Section179.org

Steve

 

[rjkobbeman]

I guess it has changed. The first time I took advantage of section 179 that rule was quite clear. Looks even better now.

 

[sweettractors]

I also think you have to keep the equipment in service for its normal depreciation schedule. You can't claim a section 179 deduction for a piece of equipement that normally depreciates over 5 years and then sell it the next year.

I think you can sell it before the normal depreciation schedule runs out, however, the IRS recaptures a pro rated part of you got upfront. Ken Sweet

 

[sweettractors]

You have that and don't pay taxes when you buy the equipment if it is a farm expense.

Or a business expense. Where you use the equipment in you business. Ken Sweet

 

[rjkobbeman]

Man, the more I read up on this the more complicated it gets. It seemed like for years section 179 didn't change all that much. Now it seems to change a lot from year to year.

 

[TripleR]

Or a business expense. Where you use the equipment in you business. Ken Sweet

Thanks, I didn't know that, I only thought it applied to farms.

 

[Dr_Zinj]

Yeah, I don't see any way to take the purchase cost as a tax credit or deduction for homeowners. About the only way to reduce purchase costs would be to roll the cost into an existing or new home mortgage as a way of financing the tractor & equipment and claiming the interest on the loan as a home mortgage interest deduction.

Trouble with that is for most 20 to 30 year mortgages, you end up paying about twice the value of the money borrowed (discounting it's decrease in value due to inflation). So paying 60 to 80 thousand over 2 to 3 decades for a $30,000 to $40,000 tractor suddenly doesn't look that attractive.

Still looks like the best way for a home tractor buyer is to save up and pay cash all at once. Either that, or incorporate as a small business. Unfortunately, my degrees are in Computer Science, and Management, not an MBA; so I'm not sure about the pros and cons of that move.