Your brewery has a lot of expensive equipment in it. Did you know that it not only helps you make great beer, but it could also reduce your tax liability? It can, using what is called a Section 179 Equipment Deduction.
Most of the time, when you buy a piece of durable equipment, you can “write off” only a little at a time over the expected lifetime of that equipment. This is called depreciation. To illustrate this, consider a $50,000 bright tank written off in $10,000 chucks over 5 years. So every year, you’d get to “spend” $10,000, eliminating $10,000 of revenue, thereby reducing your taxable profits, meaning your tax liability goes down.
What would be much better is to write off the entire cost of the equipment in the year you buy it. This is where Section 179 comes in! The powers that be want to encourage you to buy more equipment this year to become more productive and expand your business, increasing your business and creating jobs. The thinking is that you might add more equipment, and sooner rather than later.
But wait, there’s more! Because of the tax implications, your new equipment is even cheaper than you think! Say you buy $300,000 worth of new equipment. Because of Section 179, you get to write that all off in the year it was purchased. If your company is usually taxed at 35% (a common corporate level), that’s $300,000 * .35 = $105,000 in taxes you no longer have to pay. So, because you bought $300,000 worth of equipment, your tax bill goes down $105,000. So that $300,000 worth of equipment really only cost you $195,000! Isn’t buying more equipment to increase the size of your business a better deal than just raking in the cash (and getting taxed on it)?
There are limits to the equipment you can write off in a given tax year, along with caps on equipment purchases generally. The Section 179 Deduction is supposed to encourage small- and mid-sized businesses, not corporate behemoths. As of this writing (February 2017), businesses can immediately write-off up to $500,000 for up to $2 milllion in equipment purchases. There are rules about what happens if you are between $500,000 and $2 million as well as declining ability to take this deduction as you approach $2.5 million.
So, if you are a successful brewery that is generating an operating profit, consider spending that profit on equipment you’ve always wanted anyway, because if you don’t, you’ll just end up paying more in taxes.