Spend it to make it.

[cuttin edge]

The last 4 or 5 years have been really good years for the company. This past summer, according to the higher ups was the best ever.. So far, 3 new pick ups, and a super duty for the owners. 2 new F350 4x4 work trucks, a new tandem Freight shaker dump truck, a new Takeuchi rubber track (earlier in the summer though). A new Bobcat rubber track skid steer, a new Volvo L110H, a new Linkbelt 245, a new 450 John Deere tractor on order, as well as a new Volvo Double drum asphalt roller. There is also talk of a new Etnyre Float, as well as a tri axle Larochelle dump trailer. I asked about the spending spree, and was told, and I've heard this before, that if they re invest into the company, the tax man does not hit them as hard. Just wondering if this is similar south of the border?

 

[CM1995]

Yes.

We are not near as big as ya'll's operation but we bought a new Cat 325 excavator this year in order to take advantage of the tax savings. No sense in paying any more to our federal, state and local partners that takes 30%+ per year already.

 

[crane operator]

Uncle Sam makes it advantageous to buy new equipment/ trucks.

There's lots of little ins and outs, such as one time depreciation vs scheduled depreciation and all kinds of other tricks with multiple corps, and leasing/ renting equipment, interest deductions and so on. Bigger you are the more you can afford the accountant to play games.

But it basically breaks down like CM1995 says. If I make $100,000 this year. I have to put that down as "income". I will pay taxes of (basically) 30% or $30,000 on that income.

But if I instead buy a truck for $88,000 (ford raptor with tremor booby seat shaking package, is quite popular I hear). Then $88,000 is a expense off of my $100,000 income. So instead of paying $30,000 in taxes on my $100,000. I buy a $88,000 truck, then I only have $12,000 of income, then I would pay $3,600 in taxes on the income.

So $30,000 (taxes on 100k), less the $3,600 (taxes I actually paid) = 26,400.

Which means uncle sam is paying for $26,400 of the new pickup- because I either buy the truck, or pay it to him in taxes.

 

[Joe H]

Seems a lot of money just to shake your boobies.

But hey, if that's your thing............

Joe H

 

[cfherrman]

If on paper your company is not making money your doing it right

 

[CM1995]

Which means uncle sam is paying for $26,400 of the new pickup- because I either buy the truck, or pay it to him in taxes.

Uncle Sam isn't paying for anything - you are just keeping more of what you have earned.

BTW - the Ford Superduty messaging seats are quite nice, haven't had the opportunity sit in a Raptor.

 

[crane operator]

BTW - the Ford Superduty messaging seats are quite nice, haven't had the opportunity sit in a Raptor.

I figured you'd catch that. I can't handle a massaging chair, it makes me squirm all up, like other people talk about nails on a chalkboard. But my wife I think would love massaging seats in her next ride.

Really, the pickup isn't a great example, and the numbers are all a little small. Where it gets real is when you start adding zero's to the end of the equation.

 

[CM1995]

I figured you'd catch that. I can't handle a massaging chair, it makes me squirm all up, like other people talk about nails on a chalkboard. But my wife I think would love massaging seats in her next ride.

Really, the pickup isn't a great example, and the numbers are all a little small. Where it gets real is when you start adding zero's to the end of the equation.

Wife is sold on the seats so much she said I couldn't buy another truck without them. Oh well Happy Wife - Happy Life.

 

[Welder Dave]

I knew a dairy farmer who'd buy a new $80-$100K JD tractor a few years in a row just so he wouldn't have to give the money in income tax. He just passed away last year at 65. He was overweight and had some health issues. He died with over $2,000,000 in cash and figured it wasn't enough to retire. He never flew or went on vacation and the farm was paid for. Should have looked after his health much better. His wife was kind of a snob like they were a better class of people because they had more money. He was OK though. Something came up in conversation and I asked if they had a good lawyer. His wife said yeah but I won't give you his name because he wouldn't talk to you. How do you know? You don't even know why I was asking.

 

[thepumpguysc]

A year or 2 before the owners sold the company, they called a meeting..
They told us all that this was the worst year in the history of the company and there won’t be any profit sharing or raises this year..
And I swear to God.. the very next day, BOTH OF THEM drove in, in BRAND NEW F-150 LOADED P/U trucks under the guise that they were company trucks.. Nobody was allowed to drive them and they were driven home every night..
(Personal vehicles)
That was the final straw for me..

 

[Vetech63]

LOL...........I make nothing. REDDDDDDDDDD every year.

 

[terex herder]

Careful Vetech, you could be classed as a hobby business.

Another reason to buy equipment instead of paying taxes is USA businesses no longer have loss carryback ability. If you make and pay taxes on 100K per CO's example, that 21K in taxes is gone, you now have 79K. (21% federal, as your business is a corporation). Next year you lose money. You can't claw back the 21K in taxes you paid.

But if you bought a 100K piece of equipment you made 0 and paid 0 taxes. Now if you lose money next year you can sell the equipment, probably for 79K. You are in the same place, but have had a piece of equipment to use for a year.

A bad part of the corporation is the profit is inside the corporation. To get it into your personal account, you have to pay personal tax on the money you take as a dividend, so you are probably going to pay 15% or 20% tax on that. If you take it out as wages, the picture is even worse.

 

[cfherrman]

I had an accountant that would say that about the hobby business but I have talked with people that take a loss every year for 10+ years. I would guess if you have a lot of income or assets they might not say that.

 

[CM1995]

LOL...........I make nothing. REDDDDDDDDDD every year.

We show a profit however the balancing act is to make it almost the same amount as the bonus depreciation for the year.

Another reason to buy equipment instead of paying taxes is USA businesses no longer have loss carryback ability. If you make and pay taxes on 100K per CO's example, that 21K in taxes is gone, you now have 79K. (21% federal, as your business is a corporation). Next year you lose money. You can't claw back the 21K in taxes you paid.

But if you bought a 100K piece of equipment you made 0 and paid 0 taxes. Now if you lose money next year you can sell the equipment, probably for 79K. You are in the same place, but have had a piece of equipment to use for a year.

A bad part of the corporation is the profit is inside the corporation. To get it into your personal account, you have to pay personal tax on the money you take as a dividend, so you are probably going to pay 15% or 20% tax on that. If you take it out as wages, the picture is even worse.

Well said TH.

 

[MG84]

Let me preface this by saying, I'm taking about the sole proprietor/small business level, not large corporations.

Something I hear all the time is "my accountant says I need to buy (whatever) to avoid paying taxes." Half the time the person saying this is basically financially illiterate and I just want to shake them. Far too often people end up spending 100% to save 30%. If you truly NEED the equipment, then by all means buy it and write it off, but often it becomes a trap of constantly purchasing new equipment to avoid paying taxes, while not looking at the bigger financial picture. Farmers and contractors unfortunately can be a classic example of this. Full disclosure, I'm a contractor and farmer myself, but I do also have a degree in economics and farm business management.

I've known a few that the following has happened to almost verbatim, the situation plays out like this: Farmer Bob has farmed all his life, maybe even inherited the land, finally worked up to making a pretty hefty gross income. Along the way the advice was to "not show a profit" so he's constantly been reinvesting in new equipment, new trucks, buildings, etc (things which are all going down in value BTW). Every year he has to just spend more, more, more to avoid the evil tax man. Instead of investing in retirement accounts, mutual funds or other investments (because who trusts the stock market) he's just building net worth through land and equipment. Then it comes time to retire. No real cash in the bank since it was all spent on 'things' and no retirement accounts for the same reasons. To add insult to injury, no social security because he showed the net income of a pauper despite grossing six figures. So what's left? Have an auction, sell off everything for pennies on the dollar, sell off all the land, and MAYBE have enough to buy a house in town and live a few years on. Like I said, I've seen this first hand, more than once.

I have different strategies for my two businesses and do buy new equipment from time to time. However, having a business that is completely solvent and not investing too much in things that go down in value is critical IMO. If I have to pay some in taxes to invest in non-deductible/non-tax deferred investments then so be it. Putting EVERYTHING back into the business and ignoring the big financial picture is a pitfall that is all too easy for the small businessman to make...

 

[terex herder]

An IRA is a good thing, Roth even better, because they can't be touched in a bankruptcy as long as they aren't pledged as security. Otherwise, if there is a better investment than your own business just sell out and put your money in the better investment.

MG, where are you that farmland hasn't been one of the best investments available?

 

[Welder Dave]

Some say betting on real estate isn't the best investment. I know a guy with basically a motorcycle repair shop and accessory shop. He wants to retire but apparently if he splits up the business and the property that he also owns he'll have to pay a fortune in taxes. I'm not sure if it's capital gains but it's a hard sell. It's a repair shop. He doesn't have a dealership so there's nothing proprietary. Maybe some name recognition for a little while but a new owner would have to establish their own reputation.

The shop is an old service station with 1 small bay. Beyond over crowded. He has 2 M/C lifts side by side. There's just enough room to walk around each lift and in between them. It's a PIA for just 1 mechanic. With 2 they couldn't work in between the lifts. He has to keep 30 or so bikes, quads and a few sleds outside. I wouldn't be happy as a customer if my bike had to wait for parts outside in the weather. This includes in the winter. He takes about 6 weeks off in the winter and has a yard full of bikes and other vehicles sitting outside in the snow and cold (-40C) at times.

 

[MG84]

An IRA is a good thing, Roth even better, because they can't be touched in a bankruptcy as long as they aren't pledged as security. Otherwise, if there is a better investment than your own business just sell out and put your money in the better investment.

MG, where are you that farmland hasn't been one of the best investments available?

I'm in Southwest VA, farmland here is nothing like that in IL or IA, but is still a decent investment if you can buy it right. You make your money on land/real estate the day you buy it, not when you sell it. Cattle have also been a good investment for me, but can be risky.

As of right now investing back in my construction business is by far my best ROI, however that may not always be the case. I'm a one man show, and don't plan to expand, so there is only so much equipment you need. Sure I'll upgrade stuff as needed, but I've never used buying equipment as a strategy to avoid paying taxes. I look at it the opposite way, I buy only what I need and the tax savings are a bonus. With that being said, I am very diligent to write off everything I legally can, right down to the smallest supplies for the shop or my office, business related travel expenses and so forth. I also don't plan to do construction forever, there has to be a plan B at some point, which is where other types of investments and passive income comes in.

 

[cuttin edge]

They have been buying new tandem dump trucks every couple years for a while now to replace an aging fleet of internationals. I think they are beginning to keep track of repair costs, and to replace something that is sucking a lot of cash in parts. I actually thought they might upgrade the 1950s asphalt plant with something a little newer but I guess not. There are a lot of big companies an hour away, and I guess it's best to stay up to snuff.