We get lots of questions about acquiring equipment at the end of the year. Simply put, if you buy equipment and put it to use before the end of the year, (even if it is the last day of the year) you get to claim the Section 179 deduction and get the full $20,000 write off, if you choose to do so. The difficult part of the question is if you acquire equipment during the fourth quarter, do you get the Section 179 deduction, i.e. the $20,000-plus depreciation or do you get it without depreciation? If you do acquire equipment sometime during the fourth quarter, you will get a small amount of depreciation in addition to the $20,000 write off. The amount of depreciation will not come close to what it would have been had you acquired the asset prior to the fourth quarter. So if you get a rig and put it to use prior to Oct. 1 of the calendar year, in addition to the Section 179 deduction of $20,000, you can still get a pretty good hunk of depreciation. But if you acquire that rig Oct. 1 or later, the $20,000 deduction remains the same, but the depreciation would be substantially lower. There are additional rules that you should be aware of; such as, if you acquire equipment in excess of $200,000 during the year, you do not get the full Section 179 $20,000 deduction and if you acquire equipment in excess of $220,000, you get none. Also, if you acquire equipment throughout the year, but the greatest portion is in the fourth quarter of the year, your depreciation will be substantially lower than had the greater portion been acquired prior to the fourth quarter. The good news is you still have the option to choose your depreciation method and term of write-off in most cases. That, however, should be done with a direct eye on your income tax liabilities and the length of time that you normally keep equipment.
In the October issue of Land Line, we talked about substantial savings you can get by making regular $2,000 annual contributions to your IRA or Roth IRA. There are also other retirement plans that can yield even greater deductions than the $2,000 IRA. There is a relatively new plan called the Simple Plan that, in most cases, must be opened by Oct. 1 of the year in which you are claiming a deduction. The Simple Plan will allow you to put away dollar for dollar of business earned income up to $6,000. Another plan, which gives you an even greater deduction, is the IRA SEP retirement plan. This plan allows you to put away up to 15 percent of your net earned business income. The beauty of this plan is that it can be opened as late as April 15 for the prior tax year or as late as the due date of any extensions filed.
An even greater deduction can be had through Keogh Plans. These are self-employed retirement plans. It allows you to put away up to 10 percent of your net business income for pension purposes and 15 percent of your net business income for profit sharing plan purposes or a combined 25 percent deduction. Caution: Keogh Plans must be opened prior to the beginning of the year following the year for which the deduction is for. For example, if you wish to get the Keogh retirement plan deductions for the year 2000, you must open up the Keogh plans prior to Jan. 1, 2001. The plans can be opened with no money down or with as little as $5 in each plan.
Some plans can be opened with little or no money down
Many people ask us where they should open their retirement plans. Our feeling is that retirement plans should be opened at a stock brokerage house, which would enable you to invest the money in stock equities. Everybody knows that investing in stocks carries a greater risk than investing in cash. However, stocks will protect you against inflation and over the long haul should do much better than a cash investment. After all, you need the money to grow so that you can reach your retirement goal. But remember, the higher the potential return, the greater the risk.
This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. Contributions to this article were made by Shasta May, Director of Business Development for PBS. If you would like further information, please contact Barry, Howard or Shasta t 800-697-5153. Visit our web site at www.pbstax.com.