By Richard Alexander
One of the most challenging business decisions — and balancing acts – companies and other enterprises face involves the=2 0purchase of capital equipment.
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Maintaining cash flow in every business is paramount and cash reserves are critical. Capital expenditures from current profits must always be made with one eye on the year’s income tax bill. When capital improvements are paid from current income, only a limited portion of the monies spent on capital equipment is deductible in the year of purchase.
Enter the IRS approved depreciation schedule, which require that the cost of capital purchases be expensed, or deducted from income, over the useful life of the asset. That leaves the business owner purchasing capital equipment with less cash, yet still facing tax liability on the full amount of earned income.
IRS depreciation schedules — and the requirement to expense a capital expenditure over many years — have led to the use of capital leasing arrangements, which allow for capital purchases on credit wrapped together under the label of a lease. Capital leasing deals (just like the lease of a car) increase the total true cost of the acquisition by the cost of the leasing agent and insurance for the benefit of the agent, as well as the cost of credit, but allow for the lease payments to be deducted as an expense against income.
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This convoluted and costly arrangement is no longer enough. It is time to think outside the box, especially when our economy needs every boost possible and credit is tight. There is nothing sacred about depreciation schedules, which merely are a way to increase taxes for businesses that want to increase productivity by investing in capital purchases — exactly the things our nation needs to promot e and support, not punish, during a recession.
So why not scrap the depreciation schedules — and instead let the taxpayer elect, without IRS control, to use a depreciation period of one year, or however many he desires?
Ask any CPA with business clients the most popular question he or she hears in December and it will be: “How much can I spend on office equipment before the end of the year and take a full deduction this year?”
The good news is that in the past several years the rules have been relaxed by the IRS. The amount that can be expensed20on office equipment has been increased from $30,000 to $250,000. Nevertheless, the old lengthy schedules for leasehold improvements and improvements to rental property remain the same.
Here in Silicon Valley, the electronics industry has certainly benefited from this increased allowance for office equipment purchases, but why have any limit at all? Why not set a “no-limit” on expensing capital equipment purchases? Why not allow the tax payer to elect a depreciation period — as opposed to the current IRS mandates — and let the rule apply to improving leaseholds including rental properties?
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Changing our tax laws to provide that capital expenditures can be fully expensed as deductions against income in the year of acquisition would, I believe, provide a powerful stimulus to the economy. &nbs p; Just imagine the impact of a national plan promoting the purchase of capital expenditures under this incentive. If nothing else, it would a decisive move compared to the dithering taking place inside the Beltway now.
Richard Alexander, a partner in Alexander Hawes LLP in San Jose, California, is Silicon Valley’s best-known personal injury attorney.
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