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Common types of equipment
October 22, 2015

Repair, replace or upgrade?

Funding business equipment

Is it time to repair, replace or upgrade your business’ equipment? Use these tips to guide your next steps in making equipment investments.

Part 2 [In this blog series, you’ll discover the main consideration points related to equipment investments and your small business.]

When cash is tight, use a two-pronged approach:

  1. Go for practical, inexpensive solutions in the areas that aren’t essential to your core services.
  2. Conserve your hard-won cash for essential, day-to-day business expenses, and consider seeking financing for larger technology and equipment purchases in order to stay light on your feet.

Important note: Focus on the returns your investments will provide: Will you cut costs or gain revenue by purchasing new technology? Will your purchase create new efficiencies that let you do more business?

Deductions

If you’ve decided against repairs and are opting to replace or upgrade equipment by financing or leasing, remember that office supplies, office furniture and other business-related equipment purchases are tax-deductible. Equipment can include generic office items such as computers, copiers, and fax machines, as well as industry-specific technology.

When it comes to furniture and equipment, you can choose to deduct 100% of the cost in the year of purchase, or you can deduct a portion of the expense over a period of years—this is known as depreciation.

 

Depreciation

Depreciation is designed to accommodate the fact that equipment wears out over time. For tax purposes, six categories of non-property assets are defined, each of which has a designated number of years over which its assets can be depreciated.

Consult the Section 179 Tax Deduction and the various stimulus acts that affect it. Review any planned or recent asset purchases with your tax advisor to decide what types of depreciation for which they may qualify Section 179 applies to equipment for business use, tangible personal property used for business, vehicles, and furniture.

 

Making equipment decisions with low cash flow

If your level of working capital is constricted, making equipment-related decisions is a serious matter. You never know when an equipment upgrade might be the move that gives you the all-important revenue boost you need.

On the other hand, your existing equipment has the benefit of being tried and true, and most business owners are hesitant to make a fresh investment to replace something that isn’t truly “broken.” Eventually, though, every business reaches a point at which equipment upgrades are necessary to keep the business alive. Making the wrong choice can have lasting and burdensome financial consequences.

 

When to stop repairing

We’ve all faced the dilemma of deciding when to stop repairing a much-loved or expensive piece of equipment: for most equipment and machinery there is a period of several years—maybe many more—during which you can repair equipment to efficiently and cost-effectively extend its life and usefulness. But for every item there comes a point on the downward slope at which investing in further repair is simply a costly way of delaying the inevitable.

So what’s the cost-effective solution for your situation? You’ll need to perform a basic cost-benefit analysis for replacing vs. repairing your worn-out, broken or obsolete equipment, while also considering the nature of your market and your competitors. To learn more, view our equipment funding programs online.

Click here for blog series #3.