If you think the end of the tax year is the time to buy equipment to save money; well, it’s time to think again. Why? Section 179 Accelerated Depreciation saves you no money and it can hurt your cash flow. Here’s how …
Section 179 Accelerated Depreciation in the U.S. does just that. It does allow you to accelerate or move your depreciation deductions you would take during out years to this year, but it provides NO additional deduction. Over time, you have exactly the same tax effect.
Okay, you might be thinking, “What is wrong with taking the depreciation this year instead of waiting?” Follow the cash to find out.
If you pay little or no money down to purchase $50k of equipment this year, you probably can deduct the amount as an expense and reduce the amount of income tax paid this year. “Well, isn’t that saving money? No, because there’s always next year.
Next year you still have to repay the loan (cash out) but you have NO offsetting expense deduction (depreciation). So, we get upside down in our car payment, so to speak. We pay out $12,500 of cash to repay the loan in out years and have $0 of expense deductions, which means we are paying MORE taxes in out years, precisely when we have less cash (because of the payments). Had we delayed the deduction, our depreciation expense deduction would roughly offset the cash out.
What should we do? Again, follow the money. If you pay cash for equipment, then take the Section 179 deduction. If you finance, however, you are usually better off deducting depreciation normally.
That way you will have less of those confusing moments when the accountant says you made a lot of money, yet you are wondering where in the world is the cash.