Speaking of Write Offs?

[Graphics2u]

I got an email from a large sign supply company letting me know about certain tax code that allows you to write off up to $500,000 dollars in equipment in single year. Now that's no big news, but I thought the way they are trying to sell equipment could be a little misleading. They were trying to show how you can buy new equipment and not have any expenses for the first year of payments because of the amount of money saved on the tax write off. The write off would be more than your first years payments.

Pardon me if I'm wrong but I hope that most people would realize that's not the brightest idea... They are correct about the tax savings, but what they fail to mention is that for the next 3 or 4 years after the first year of your lease or loan you will have no write offs to cover the outlay of payments for those years. That's a double whammy, you have to make enough money to make the payments but you have to pay tax on that income because you won't have any deductions for those payments you made. You would be better off, in my opinion, depreciating that equipment out over the length of your lease or loan.

Am I thinking correct on that?

 

[Fred Weiss]

It depends on what you think your tax rate will be in those next few years ... which is based on not only what you think you will be earning in coming years but on what you think will happen to tax rates at the federal level.

Perhaps you had an unusually profitable year and you'd like to preserve your cash on hand at the present time. That's where accelerated depreciation can be of benefit to you. Looking at it in the reverse: You have a lot of cash on hand and don't want monthly payments or interest costs, so you buy a new printer out of pocket. The same questions remain. Will it help or hurt your cash flow and tax liability to take advantage of accelerated depreciation or would you be better off to write your purchase off over the next 5 years?

But yes, you're correct that it's not a good way for vendors to present their products. It's kind of like the 1.9% credit cards or ARM mortgages that get you in debt and then bump up the interest rate. The intent is to make the sale by getting the buyer to make decisions based on factors other than the core reasons for making the purchase.

 

[Graphics2u]

I can see certain circumstances where it might be of benefit, I can just see someone really getting into a tough situation by following their sales pitch without thinking ahead. But then again you should be thinking ahead.

I remember someone I knew fell into a trap with a new car. The dealer every year would have a promotion to sell new cars with the payments for the first year being the age of the owner of the dealership. So for one year you had a payment of $79 or whatever. This person fell for it and then found out the payments for years 2-5 were over $500 a month, to make up for what they didn't pay the first year. They should have known better but some people don't think ahead!