Business owners often hear a familiar suggestion as year-end approaches:
“Buy the equipment—you can write it off.”
With 100% bonus depreciation available for many qualifying business assets, the potential tax deduction can be significant. But a tax deduction should rarely be the primary reason for making a business purchase.
Start with the business decision
Before considering the tax consequences, a business owner should first ask:
Do I actually need the asset?
Will it improve the productivity or profitability of the business?
Would I make this purchase without the tax deduction?
What effect will the purchase have on cash flow?
If the purchase does not make economic sense before considering taxes, a deduction does not necessarily make it a good investment.
A deduction is not the same as getting your money back
Tax deductions reduce taxable income. They generally do not reimburse the business for the entire cost of an asset.
For example, spending $100,000 solely to obtain a $100,000 deduction still requires the business to spend $100,000. The resulting tax savings will generally represent only a portion of that expenditure.
That can be an excellent result when the business already needs the asset. It can be a poor result when the tax deduction is driving an unnecessary purchase.
Where tax planning becomes valuable
Once the business has determined that an investment makes economic sense, tax planning becomes important.
The next questions may include whether the property qualifies for bonus depreciation, whether Section 179 or another depreciation method is preferable, when the asset should be acquired and placed in service, and how the deduction fits into the owner's overall tax position.
The objective isn't simply to generate the largest possible deduction. It is to coordinate the tax strategy with the business owner's broader financial objectives.
Business decision first. Tax strategy second.
Effective tax planning should improve the economics of sound business decisions—not create an incentive to make poor ones.
For business owners considering significant equipment or other capital purchases, evaluating both the business case and the tax consequences before completing the transaction can produce a better overall result.
Owner Tax Advisors works with closely held business owners on proactive tax planning and implementation throughout the year.
This article is for general informational purposes and does not constitute tax, legal, or investment advice. Eligibility for bonus depreciation and other deductions depends on the property involved and the taxpayer's individual facts and circumstances.
