Year end purchase of equipment and tax implications

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Year end purchase of equipment and tax implications

Nathan Letourneau
Investor · Hudson, WI · Member since 2016 · 82 posts · 18 votes

I am a fix and flip and buy and hold investor.  This year my fix and flip income was better than average and will bump my income into the next tax bracket.  I am thinking about purchasing a used skid steer and trailer this year for upcoming projects (possibly a truck as well).  Searching the forums, I found some information about yr end truck purchases, but not for large equipment.  I plan on writing off the full purchase price this year of the skid steer and trailer.  My question is what happens when I am ready to resell the skid steer?  I would guess there is some sort of recapture of the depreciation if I sell it...correct?  (Otherwise someone would just buy a bunch of stuff in December of one yr, write it off and then resell it the next year)  Does the amount of time I "hold on" to it make any difference?

Thanks


Nathan

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Nathan Letourneau , 

    Having more income is such a good problem to have. 

    Yes, you can expense the equipment under sec 179, but remember that you need to have taxable income (Not just cashflow but the income ) to take this deduction.

    And you are right, you have to recapture the sec179 depreciation not just when you sell it but also if the use of the asset goes below the 50% business use. This is how IRS looks at it. 

    • You purchase a machine in Year 1 for $10,000. You elect to deduct the entire cost of the machine in Year 1 under sec 179. Your taxable income in Year 1 is in the top individual tax bracket, 39.6%. Thus, expensing the $10,000 machine in Year 1 saves you  $3,960 ($10,000 × 39.6%) in federal income taxes (there may be self-employment tax savings as well).
    • In Year 2, let's say, you find a who is willing to purchase the very-lightly-used machine for $10,000. Without the depreciation recapture rules under, the $10,000 (sale price of 10, 000 - your basis of 0 ) gain you recognized will be taxable as capital gain under at a maximum rate of 20%.
    • Thus, the sale of the machine in Year 2 would increase your federal income taxes by only $2,000 ($10,000 × 20%) (and would not be subject to self-employment taxes). Consequently, without recapture, you could realize no economic loss in buying and selling the machine for $10,000, and yet reduce your cumulative federal income tax liability by $1,960 ($3,960 saved as a result of expensing, less $2,000 tax on the gain). 

    Recapture is the lower of the gain realized from the sale of property, or the depreciation deductions  taken on the business property .

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  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    8y

    Snows coming , get an enclosed cab machine with heat , make some real $$$$ . In my area a skid steer bills out at $ 150 an hour for snow 

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