Used Machinery Tax Deductable?

[modamag]

What do you guys know about this?
My friend (a CPA) told me that both my mill & lathe are not tax deductible.
Is she right for CA?

edit with clarification: it's for business use, with business entity behind it.

 

[nerdgineer]

I am not a tax expert (actually sort of the opposite...) but I don't think you can deduct depreciation on machinery you own unless you use it for a regular business (as reported in a bunch of different types of forms). And then, you can only deduct it up to the amount of money your business made, not any more.

 

[gadget_lover]

I am NOT a tax expert. You should ask another accountant.

I've never seen anything that said used equipment was not a valid business expense. My accountant has never asked me if my purchases were new or used.

The basic concept is that the cost of tools (or other assets) needed to make money can be deducted from the income that you generate. There is no test for how much money you make with a particular tool or asset.

If you don't have a business, assets (and tools) are not deductible. One of the other concepts is that if you use them to make money regularly, then you are running a business with all the taxes and licenses that come with that.

Is your accountant saying they are not deductible because you are not filing as a business?

Daniel

 

[modamag]

She just say they are used beyond depreciation (deductable) limit.

 

[BIGIRON]

I know nothing of CA tax law. I do have experience with proprietorhip IRS tax stuff. Used equipment can be capitalized at cost or market value and depreciated according to appropriate IRS rules. It might even be expensed (all deducted as an expense in the year of acquisition) depending on cost and use.

This assumes, of course, that it is, in fact, used in a real business.

The best advice has already been given. Talk to a tax attorney, cpa or enrolled agent. And preferably not someone at one of the tax prep firms.

 

[gadget_lover]

I know nothing of CA tax law. I do have experience with proprietorhip IRS tax stuff. Used equipment can be capitalized at cost or market value and depreciated according to appropriate IRS rules. It might even be expensed (all deducted as an expense in the year of acquisition) depending on cost and use.

[ snip ]

The reason this makes sense is simple;

Company A buys it for $1000. They take part of the cost as a deduction on their taxes over a few years till it's fully depreciated. So they have their full $1000 tax deduction. Now they sell it for market value... $500. They declare the $500 as income on their taxes. In effect, they have only deducted $500 of the $1000.

The buyer, (company B) now has a $500 asset to take as a deduction. This cycle continues until the machine is sold for scrap or donated to a charity.

As far as the IRS is concerned, the taxes were paid on the income and only $1000 deduction was realized between the two purchases.

If your accountant starts the clock on depreciation the day something is sold the first time..... I'd ask for a second opinion.

IIRC, depreciation is simply a mechanism whereby you can roll over your expenses to years when you actually make money so that 1) you don't have $1 million in startup costs with no income to deduct it from and 2) so that you don't go out and buy a huge hunk of hardware and avoid taxes for the year.


I could, of course, be wrong.


Daniel

 

[modamag]

Everyone is CORRECT!

The missing piece of the solution was the depreciation period.
I was told that for machine tools it's 7 years depreciation period.
So if it's pass 7 years you can not claim depreciation anymore, which is typically the case when we purchase old American iron.

Now if your equipment is within the 7 worklife period, you can claim some percentage based on some MACRS chart.

She also noted that the recent stimulus package have increase the amount you can claim too. So now would be a good time to buy if you're looking to increase capacity.

 

[gadget_lover]

So instead of depreciation you just take it as a straight deduction, right?

Daniel

 

[BIGIRON]

In business all capital items (new or not) are depreciable or expensible. It makes no difference to the current (new) owner or the IRS what the previous owner did. It will have a new depreciable life when the new buyer buys it or puts it in service.

Owner 1 buys a gizmo new for $7000 and sets it up on a 7 year depreciation, deducting $1000 per year. He replaces it at the end of the 5th year, having deducted $5000. He sells it in the 6th year for $2000. He takes no further deduction for depreciation in the 6th year and reports the $2000 sale as income. That's basically it for the first owner -- it's off his books. Owner 1 starts on a clean sheet with the replacment gizmo.

Owner 2 sets up his depreciation schedule of $1000 divided by x years and writes off that amount each year. (Actually, I think the depreciable life of a used item might be less and would be defined by the tax codes - not my territory - real estate is and we basically expense all tools and equipment when purchased) But it would have a capital value and therefore be eligible for depreciation deductions (or same year expense).

This is very much a simplification. There's lots more detail and convolutions.

Again, a cpa or attorney with tax knowledge or an enrolled agent are the people to talk to. Not all cpa's or attorneys are knowledgeable regarding taxes. An "Enrolled Agent" is an idiividual who has been vetted and tested by the IRS to represent clients just as if they were tax cpa's or attorneys. I use an enrolled agent because taxes are all she does.

Edit - I've edited this a bunch and still don't think I've presented my thoughts well, but I'm going to leave it as is. If it's just a small amount, do what you want. It probably won't be scrutinized by the IRS. But if it's relatively large, then by all means involve a knowledgeable professional.

 

[frisco]

I'm far from a tax expert...... That said, I have been in business for 25 years. Made my far share of mistakes along the way. But wouldn't have it any other way. At this point I'm totally un employable in a corporate environment..... Except my own.

My best guess is that you can expense a certain percentage of the purchase. I don't think you can put it on a depreciation schedule.

For one..... You only really only get full advantage of a deprecation schedule if you finance your purchase over a similar time span as the depreciation schedule.

Loose Example:

Purchase 5000.00
Term of Note: 5 years.
Depreciation schedule: 5 years

If you paid 5000.00 in full. You are much better off trying to expense 100% of the purchase in the same income year.

But........... You kind of open a can of worms for yourself. You must now list it as capital equipment. In Santa Clara County I think you must pay a use tax on your capital equipment. The last I remember it was 1% a year.

When you write off equipment and such..... You are in business.... File quarterly taxes, collect sales tax...... Carry insurance, keep books.

In most cases the write off "carrot in front of the nose" is not worth taking. Keeping things in "Hobby Status" for as long as you can is the best.

Hope this helps.

frisco

 

[BIGIRON]

Thanks Frisco, you illustrated my statement "lots more detail and convolutions" better than I ever could.

Another trap small businesses fall into is expensing a home office. That shoots up sparks and flares that say "look at me, look at me..". . Now that I'm semi-retired, with an office in my home, I figure the tax savings for the "home office" would be less than $1,000 per year. It's worth 10 times that not to be flagged for an audit. Been there, done that.

Edit - re: home office, I'm talking about allocating a portion of your home expense (utilities, insurance, etc) as office expense. Office equipment, separate phone lines, etc are no problem.

 

[precisionworks]

My CPA specializes in small-business tax preparation. He places every used machine I buy on a depreciation schedule. Machinery that was owned before the business started is depreciated using the cost of the machine at the time it was purchased.

Well over 90% of my equipment is used ...

 

[Handlobraesing]

What do you guys know about this?
My friend (a CPA) told me that both my mill & lathe are not tax deductible.
Is she right for CA?

You're not telling us much. Did you buy it for your OWN use or for your own business? You can't EVER expect to be able to expense for any portion that's not really BUSINESS related.

 

[jtr1962]

If you're not filing as a business, forget about deductions here. If you are, it's probably better just taking it as a one-time expense rather than depreciating it because it's way less complex that way. The only exception might be if it was very expensive and you don't have enough other income to offset this expense (i.e. in effect most of the deduction in this case would be "wasted" from a tax standpoint). In general though, you're better off expensing small equipment purchases of a few hundred dollars or less. For example, I bought a new solder iron last year for I think $90. It's not worth it trying to research if such equipment can be depreciated, what the normal depreciation schedule is for such a piece of equipment, and then bothering with the record keeping to do so. Ditto for things like computer parts. Easier to just write off this in the same tax year under maybe repairs and maintenance or office expense. After all, my business is electronics, not accounting. It's bad enough doing taxes once a year. I don't even want to think about them the other 364 days. Large purchases of many thousands of dollars though are another story, but I don't anticipate ever needing stuff like that in my line of work. If I ever got that big, then I would be able to afford a CPA to do this stuff for me.

Another thing regarding filing as a business-the IRS is getting wise to people who file Schedule C for what is essentially a hobby, and claim an overall business loss against their other income year after year. Unless you really are in business with the intention of making money, you're better off not filing as a business with the intention of deducting machinery purchases. Without knowing your situation, I can't advise you any further. To me it sounds like your accountant maybe thought you asked if you could write off the mill and lathe on Schedule A (itemized deductions). Obviously you can't, even on the "miscellaneous deductions" line.

 

[modamag]

This is filling for a business. It's not for my flashaholic hobby. The purchase is to buildup an R&D facility.

The cost of the machinery & tools well exceeds $10K. The company is too small to afford brand new stuff that are in excess of $100K at the moment.

Hope that clears things up.

 

[BIGIRON]

Looking at your original post, your specific question is regarding California. My answer to that is: I don't know.

If it's regarding IRS, then your equipment can be expensed or depreciated no matter it's age or previous use.

It also sounds like, in your last post, that your business is a start-up (or new business). That makes it more important than ever that you get your accounting right.

Most importantly, remember that internet advice, including mine, is worth exactly what you pay for it!

 

[cy]

not an accountant, but have worked with several on this exact same issue.

the answer is yes.. used machinery is tax deductible. generally the fastest method of depreciation allowable is used to gain max tax advantage.

actual purchase price in my case was used as tax basis. when you sell equipment, clock starts over again for the next person. long as you own equipment. you are allowed to depreciate scheduled amount. for instance... say equipment qualifies for a 5 year schedule. after the 5th year, all depreciation is gone. so no further tax deductions are available, until you purchase different equipment.

this goes for real estate as well. after you've own property pass the scheduled time period. all depreciation from that particular property are gone.

This is filling for a business. It's not for my flashaholic hobby. The purchase is to buildup an R&D facility.

The cost of the machinery & tools well exceeds $10K. The company is too small to afford brand new stuff that are in excess of $100K at the moment.

Hope that clears things up.

 

[Handlobraesing]

not an accountant, but have worked with several on this exact same issue.

the answer is yes.. used machinery is tax deductible. generally the fastest method of depreciation allowable is used to gain max tax advantage.

actual purchase price in my case was used as tax basis. when you sell equipment, clock starts over again for the next person. long as you own equipment. you are allowed to depreciate scheduled amount. for instance... say equipment qualifies for a 5 year schedule. after the 5th year, all depreciation is gone. so no further tax deductions are available, until you purchase different equipment.

this goes for real estate as well. after you've own property pass the scheduled time period. all depreciation from that particular property are gone.

I hate accounting with a passion and it was the worst classes I've taken, but I think equipment that provides more service in the earlier stages of ownership and vehicles are depreciated on double-declining schedule and rest are on linear schedule.

When you sell, you have to do something with loss/gain from sale of capital eqiupment..