And almost right away, my brain kicked into “and getting used equipment instead alleviates that” (since Section 179 eligible equipment can be new or used.)

So let’s talk about used equipment a little, specifically the advantages of used equipment over new (note: this assumes used equipment in decent shape and still useful in a technological sense.)

Used Equipment Is Less Expensive – You will always save money with used equipment over new. And in many cases, the used equipment is still quite relevant when compared to new. Sure, a used computer with a CRT monitor can be borderline useless due to rapid technological advances, but a used dump truck or bulldozer can typically do the same job as a new one can.

You Can Take Delivery of Used Equipment Right Away – This is a big benefit, as exemplified by my last post. Used equipment is already assembled and complete, and more importantly, it’s simply “there”, meaning you can take immediate delivery of almost any used equipment purchase. Anecdotally, I know someone who must wait several months for a new piece of equipment that needs a delayed chipset. And I know someone else for whom we financed a used skid steer last Friday, and he’s undoubtedly using it as I type.

You Can Finance Used Equipment – We will happily provide used equipment financing for most business equipment. Even private party used equipment purchases can be financed, which can be a big help to a lot of small businesses (tooting our horn here, because not everyone offers this.)

Used equipment has always been popular with small and mid-sized companies. And in 2021, the “we can use it immediately” aspect is another clear checkmark in the “advantages” column, because, assuming the equipment itself is eligible, your Section 179 deduction is safe. 

In 2021, you need to pay close attention to the Section 179 deadline, and make sure you aren’t left out. 

Is it odd that I’m saying this in May? Not this year. And that’s due to supply chains across the board being affected by pandemic shutdowns and post-reopening labor issues. And it is catching many purchasers (both consumers and businesses) off guard, and will continue to do so in the short term.

To give a personal anecdote as an example, I recently moved. And Mrs. Fletch and I left a lot of our old furniture behind, figuring we’d buy new. What we didn’t figure on was the astonishingly long lead time due to the pandemic. Seriously, we’ll be waiting close to four months for a bedroom set. We were lucky on the fridge – that only took two months… 

So what does this have to do with businesses and Section 179? Well, the rules for Section 179 state that the equipment must be purchased and put into service by midnight, 12/31. Well, if you are waiting on delivery, you can’t put it into service, can you? 

That’s why I am mentioning this in May. If you are looking to purchase equipment in 2021 and planning to take a Section 179 deduction for it, you should be thinking about doing it soon. The last thing you want in this situation is to miss the “put into service” part of the deadline (it’s not enough if you pay for the equipment in full in 2021 – if it’s not put into service, it’s not eligible for Section 179.) 

I don’t have to tell you that 2021 is a strange year. As we emerge from the pandemic, it’s going to take time for all industries to resume normal manufacturing and delivery schedules. So definitely check and see how long your purchase is going to take to get to you. And if you need to, buy it now. 

The two accounting methods are: 

Book Accounting (which could simply be called “accounting”) utilizes Generally Accepted Accounting Principles (GAAP), whose rules are set by the Financial Accounting Standards Board (FASB). 

Tax Accounting relies on the Internal Revenue Code (IRC), and, as you may have guessed, is used  by the Internal Revenue Service (IRS).

So what’s the difference between book accounting and tax accounting? 

Book Accounting provides business owners and other interested parties (such as lenders) with accurate and detailed financial data, giving them a clear picture as to how the business is actually doing.  

Tax Accounting provides the IRS and other taxing authorities (such as States and municipalities) with taxable income and deductible expenses, which of course determines how much tax the business owes.

To be honest, the differences between the two are fairly small. But one key difference has a LOT to do with equipment and equipment financing (and leasing, which is what prompted this series in the first place). 

This difference is in how equipment and assets are viewed and depreciated.    

Under Book Accounting, the cost of any Equipment is depreciated/expensed over a period of time matching the Equipment’s useful life. This ‘Straight-Line’ method is the most common method used to calculate depreciation expense under GAAP. 

So basically, you buy equipment, and depreciate it a little each year depending on how long the equipment is supposed to reasonably last. 

Under Tax Accounting, the cost of Equipment is depreciated/expensed much quicker, which minimizes the immediate tax liability. Tax Accounting uses what’s called the Modified Accelerated Cost Recovery System (MACRS) method, which allows larger amounts expensed in the initial years.

In recent years, Section 179 and bonus depreciation are subtracted before computing MACRS deductions, allowing businesses to fully write-off the cost of equipment in the year it is obtained. Currently, the bonus depreciation is 100% thanks to 2017’s Tax Cut and Jobs Act, with no upper limit, so almost all equipment will fall under this. 

Real Quick: WHY?

People have asked “why are there two accounting methods”? The answer can be very intricate, but it can also be simple. Imagine you wanted to loan a business money. You want to make sure they are stable, with solid income. 

The following is general, but illustrate why both exist:

If you look at the business through a tax accounting lens, the business may seem to have low income, because of all the short-term high depreciation to save on taxes. Based on only that, you may not loan them money. 

But a look at them through book accounting shows the company’s true worth… you may have a fine loan candidate there. 

The finance guy in me knows it’s useful to understand the fundamental differences between the two accounting methods, which I hope I’ve accomplished for you in this post. 

Of course, this argument has been going on for centuries (the USA was founded partly due to unhappiness with taxes), but there is a very valid point here. “Enough with the taxes” say small and mid-sized companies, and they’re right.

Businesspeople, especially those entrepreneurs who put in the 12-14 hour days to make their businesses succeed, always seem to take the brunt of it. It’s easy to say “tax Bill Gates more” (even Bill says that.) But tax increases typically include more taxes on working businesspeople. The owner of that 5-75 employee company feels like he or she pays enough taxes, and I cannot say I disagree.

But taxes are inevitable. We can yell, write, and argue until we are blue in the face. The taxes will still be there.

So let me tell you the single best way to reduce your tax burden. Use Section 179 annually. 

This accomplishes two things: First, you get equipment your business needs anyway. All businesses use equipment, so getting yourself on a consistent “let’s upgrade our equipment” schedule can help you in a productivity sense (better equipment = more efficient operations). 

But the big takeaway is getting new (or new to you) equipment also lets you MARKEDLY REDUCE THE TAX YOU PAY.  

Section 179 lets you write off the entire purchase price of qualifying equipment (even if you finance the equipment). This comes right off your taxable income, and can really make a huge difference in your tax obligation. 

In short, you keep more of your own money, instead of giving it to the IRS. There is not a small or mid-size business owner alive who doesn’t appreciate that.

I’ve been touting Section 179 for well over a decade now. But this is the strongest I’ve ever felt about it. It’s your money – keep more of it. 

But like always, let’s start out with the fun stuff: sports.

As I type, the NFL playoffs are going on, and to my crystal ball, I’m seeing a Packers-Bills Super Bowl. And for long-suffering Bills fans, this is your year! Yes, the Bills finally take one home.

Baseball – I’ve been on a NY Yankees kick for a while now, and they’ve fallen short every year. But this coming year, I’m going to stick with NY, but go across town to the Mets. New owners, new players, new life. And a championship in 2021. 

Basketball – how do you go against the Lakers? You don’t. Until LeBron retires, it’s his championship to win, and everyone else is playing for second. I grew up a Michael Jordan fan, and you just didn’t bet against Michael, and we’re seeing that with LeBron now. What I wouldn’t give to see these two go head to head in their primes.

Hockey – I’m terrible at this one. Let’s go with the Vegas Golden Knights. Just because it would be so cool to have the city of Las Vegas win a title. 

Now let’s get to business. 2020 was not good for many companies, with good reason. And this year, we have the wildcard of the ongoing pandemic, with vaccines getting distributed. Some people are down on the economy, but I’m not – I’m going to predict we will have a surprisingly good year economically. Here’s why: 

As life slowly shifts back to “normal” (whatever that is these days), we have a populace chomping at the bit to get back “out there”. I know Mrs. Fletch and myself are really looking forward to going out to eat on a regular basis, and I’ve stated in this blog how much I like concerts, and as soon as they start up again, Fletch is going to be there. There are millions of us looking to get back to our lives as much as possible, so I predict an almost mini-boom for an awful lot of industries. For example, my buddy put off buying a car last year. But he weathered the storm, he’s still employed, and now he’s shopping. Take that thought, multiply it by countless products, activities, and reasons, and you get a recipe for a pretty solid bounce back. That’s my thought anyway.

No huge tech predictions this year, as companies have pivoted to adjust to our new normal. Ok wait, we will see a solid improvement in collaboration tools and software, as it further cements itself into the mainstream. We’ve realized that “work from home” can be done, and I feel a lot of companies will continue some form of this at least part-time, as both a cost savings, and because employees like it. 

There you go – some predictions for 2021. Oh yea, and Section 179 got a small bump to a deduction limit of $1,050,000 (up 10k from last year.) Make sure you use it, because you only have 11 and a half months left!

But there is a change in the air – I’m seeing companies look harder than ever at financial flexibility, and remaining as nimble as possible. You could even say they are resolving to do so. Let’s discuss that a bit.

The pandemic has shown us how fragile it all is, and how everything can change on a news headline or two. Companies can no longer afford to have their assets needlessly tied up. Staying liquid and “ready for anything” is very desirable.

So what does that mean for small and mid-sized companies? It means businesses who finance equipment are going to increasingly look to shed lending restrictions, like blanket liens, minimum bank balances, and requalifying for a loan every year. We go over these extensively here.

If you borrow money from a bank, and thus have a blanket lien and a minimum balance they insist you keep, you are FAR from financially flexible. If there’s an event tomorrow that affects your industry, your cash and your assets are tied up. In plain terms, you can’t make a financial move. 

The other really popular bank restriction is making you requalify for the loan every year. Well, how many industries do you think were a bit off in 2020? So for many of those companies, not only did they have an off year, but the bank has every right to say “yea, you know that equipment loan we gave you two years ago? Well, your current numbers say you wouldn’t get it today, so we’re calling it all in right now.” Ouch. 

Financial flexibility folks, that’s where it’s at. Choose an equipment lender who does NOT use these restrictions (hint hint – us!) 

Happy New Year everyone. Stay safe, stay healthy, and stay flexible!