Is there real value in buying a piece of equipment for a tax deduction?

Scott Stone

New member
GROSS 100,000 100,000
Operating expense 25,000 25,000
SALARIES 25,000 25,000
New equipment for tax deduction 5,000
Taxable income 45,000 50,000

Income tax 39% 17,550 19,500
After Tax income 27,450 30,500


I hear some people that say that you need to buy new equipment all of the time to get a tax deduction. In my experience, that is not the way to be able to retain the greatest profits. In the simple exercise above, it is easy to see that even purchasing a simple pressure washer at $5000 means that there was a true cost of $3050, after taking into account the tax deduction.
So, the next question is, when do I buy new equipment? My philosophy, and what has worked for me, is that I buy a new truck when I have solid contracts in hand for another employee, and an employee to operate it. If I am going to replace equipment, I replace it when the annual cost of maintenance is more than what it would cost me to make payments on the equipment on an annual basis. There are some exceptions, but that is the basis of how I make the buy decision.
Let me give you an example: I have a truck that is a 2005 Ford f-350. If I was to replace it new, it would cost me close to $50,000. The truck payment on that would be about $995 a month. If my repairs on my F-550 average about $7000 a year, because I need a new transmission, or the AC Went out, then it probably is not time to replace. One thing that can accelerate the purchase cycle for me is we have repeated small breakdowns. Part of the cost of repairs is downtime, and how much that piece is going to cost me in tow bills, in having an employee sitting on the side of the road and lost productivity.
I have known a lot of very successful contractors, and most of the best have equipment that is easily repaired, and though the frame is old, it might have a brand new motor and pump on it, because that is overall less expensive than buying a brand new piece.
So, the next time someone tells you that they need to buy a piece of equipment for a tax deduction, rest assured that it has less to do with a deduction and more to do with they wanted a new piece of equipment.
 
Great info Scott, thanks.
 
When you get to that scale it makes sense. It is cheaper for us to buy used tracks and equipment at this stage.

When you find good solid trucks that have been maintained well all your money goes to the trucks and not to the bank.

For example, when we first had the dry clean business I financed the vehicles, thinking it was prudent to get new or newer vehicles to reduce breakdowns.

It didn't work.

They still broke down, usually about the time the warranty was up and we still had a couple of years of payments left.

Then we had thousands of dollars of payments AND major expenses like AC, transmissions and even a blown engine once.

Right before I sold that business I started to realize I was doing it the wrong way. The only thing that saved me was the mileage write off because we had high mileage routes. On the cheaper, reliable, economical used vehicles our write offs exceeded the operational costs by a lot.

Once we started this business I needed heavier equipment and opted to buy new or newer equipment to avoid breakdowns because I hadn't fully learned my lesson.

The payments on two vehicles, a custom trailer, the ultrasonic equipment and the lift exceeded $4k per month not counting the insurance. I could no longer take the mileage deduction because our routes were so tight.

Now we own all our equipment and vehicles. We use reliable, cheap to fix gas fords (except for one) and budget $1500 per month for repairs. A transmission is no longer a worry because two months without a major repair and there is money set aside that will cover it. We go through all the stuff and decide if we need to spend our repair money on repairs or go to to November auction and buy another truck.

That allows us to spend more on sales and marketing that are 100% deductible every year. That allows us to travel and go to events that are also deductible.

We are also blessed with the fact that Jill's dad is a 20yr plus Ford mechanic and he takes care of all our repairs.

The tax system is designed to alter our behavior, but it is a trap.

It is designed to get us to buy new trucks. electric vehicles, finance our homes, and pay for whatever political whims rule the day. It is designed to take your money and float failing "green" companies and car manufacturers that coddle the unions.

We end up with little savings and have to fork out all our money to pay to keep these failing enterprises afloat and pay their ridiculous union wages and support the banks.

You have to do some research to find ways to operate efficiently without playing into this forced confiscation of your profits.



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As a side bar, used trucks are fully tax deductible, too. But even a $1000 truck takes $610 off of your bottom line after taxes.
 
Whats the deduction for refurbishing? I know i want to see if anyone else does ?
GROSS 100,000 100,000
Operating expense 25,000 25,000
SALARIES 25,000 25,000
New equipment for tax deduction 5,000
Taxable income 45,000 50,000

Income tax 39% 17,550 19,500
After Tax income 27,450 30,500


I hear some people that say that you need to buy new equipment all of the time to get a tax deduction. In my experience, that is not the way to be able to retain the greatest profits. In the simple exercise above, it is easy to see that even purchasing a simple pressure washer at $5000 means that there was a true cost of $3050, after taking into account the tax deduction.
So, the next question is, when do I buy new equipment? My philosophy, and what has worked for me, is that I buy a new truck when I have solid contracts in hand for another employee, and an employee to operate it. If I am going to replace equipment, I replace it when the annual cost of maintenance is more than what it would cost me to make payments on the equipment on an annual basis. There are some exceptions, but that is the basis of how I make the buy decision.
Let me give you an example: I have a truck that is a 2005 Ford f-350. If I was to replace it new, it would cost me close to $50,000. The truck payment on that would be about $995 a month. If my repairs on my F-550 average about $7000 a year, because I need a new transmission, or the AC Went out, then it probably is not time to replace. One thing that can accelerate the purchase cycle for me is we have repeated small breakdowns. Part of the cost of repairs is downtime, and how much that piece is going to cost me in tow bills, in having an employee sitting on the side of the road and lost productivity.
I have known a lot of very successful contractors, and most of the best have equipment that is easily repaired, and though the frame is old, it might have a brand new motor and pump on it, because that is overall less expensive than buying a brand new piece.
So, the next time someone tells you that they need to buy a piece of equipment for a tax deduction, rest assured that it has less to do with a deduction and more to do with they wanted a new piece of equipment.
 
I agree with Scott. When repairs and downtime out way the cost of replacement we go for replacement. Tax deduction doesn't way in on the decision but it does become the extra benefit to a point. Also if a new piece of equipment can improve our efficiently that way in on the decision as well. Example being going from a 5.5gpm to a 8gpm washer.
 
The deduction for refurbishing is the same as the deduction for buying new. It is just less expensive, typically.

BTW, lest anyone wants to imply I have nothing but old vehicles in my yard, they would be sadly mistaken.
 
Great thread. This is why this forum and or site is the best I have found.

Great topics for a professional- experienced veteran's offering insight and helping others.

I appreciate the insight and the responses from both sides- guides and or provides insight when I increase the fleet size. Currently we have 10 trucks ranging from P/U's to F-700's, I have debated and mathmatically gone over both scenarios. I still find value in "lightly used" trucks- plus it helps the wallet.

Thanks again for valuable information
 
The deduction for refurbishing is the same as the deduction for buying new. It is just less expensive, typically.

BTW, lest anyone wants to imply I have nothing but old vehicles in my yard, they would be sadly mistaken.

Scott, by now most of your trucks are thoroughly used. In a few more years you might be hearing from me with a low ball offer on them. Lol.

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I really like the smell of a new truck...... Our units are generally setup for specific jobs and are ordered the way we require them. Unfortunately just going to an auction and picking out a truck isn't something that can be done although it is probably the smarter thing to do for most people.
 
I once worked for a gentleman that had over 100 pickups on the road. he told me that he " very rarely buys new ". But his son had two ford f350 xlt lariats. (55k each ) go figure.
 
I said this before, but the largest lighting company in town uses old 1980's pickups. It has become their trademark. New companies can't compete with their pricing.

It is cheap as dirt to keep them on the road and they keep them looking good with new body panels as needed.

It helps that there is no rust here.

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Depend how you list the deduction
The deduction for refurbishing is the same as the deduction for buying new. It is just less expensive, typically.

BTW, lest anyone wants to imply I have nothing but old vehicles in my yard, they would be sadly mistaken.
 
I have a bunch of trucks I bough new in Nov. 2012. I don't regret that decision for a second because I had to buy so many trucks over a short time period. I have since bought some used trucks, and had to put ome money into them for used truck problems, and have been happy with those trucks, as well. I can see advantages both ways.
For what it is worth, my personal truck has the highest mileage o all.
 
I have a bunch of trucks I bough new in Nov. 2012. I don't regret that decision for a second because I had to buy so many trucks over a short time period. I have since bought some used trucks, and had to put ome money into them for used truck problems, and have been happy with those trucks, as well. I can see advantages both ways.
For what it is worth, my personal truck has the highest mileage o all.

How much? I bet not as many miles as Ron's blue truck.

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