Dr. Watson watched another potential client walk out of his music studio door.  It wasn’t that Dr. Watson was a poor music engineer.  In fact, he is great at his craft.  His problem was that his equipment is outdated and slow.  Dr. Watson knew he needed to update his systems but he didn’t have the cash available.  He called me for ideas.

During our consulting session, we discovered that Dr. Watson could “kill 2 birds with 1 stone”.  He could get the equipment he needed now and reduce his taxes at the same time, but he had to act fast!

Recent changes in the IRS tax laws would allow Dr. Watson to completely write-off his new equipment (up to as much as $500,000) this tax year (2011) if he entered into a purchase agreement and began using the new equipment before December 31, 2011.  (Normally, he would have to “depreciate” the cost of the equipment over its useful life which could be anywhere from 3 to 40 years.)

Using a credit card for a small down payment and the vendor’s line of credit, Dr. Watson purchased $10,000 in new equipment for his music studio.

So, What does this do for Dr. Watson?

• As a sole proprietor falling into about the 20% tax bracket, his purchase will save him $2,000 in taxes when he files his tax return,
• He’s now able to attract new business and offer his previous and current clients faster service on cutting edge technology,
• He preserves his cash now and won’t have to make a payment on his equipment for 30 to 45 days.  (Just enough time to bring in a couple of new paying, clients!)

The IRS tax laws used by Dr. Watson also apply to the business use of computers, software, vehicles, furniture and fixtures, etc.  but these laws may change after December 31, 2011.

As usual with the tax laws, your situation may be different.  In some cases, if your business is going to report a loss before these equipment deductions, you won’t be able to use the write-off this year.   The write-off will carry forward to the next year.  This is why you will need to review your particular situation with your tax accountant (or me).

Hopefully, you’ve found this helpful.  Feel free to comment.

If you’d like to contact me regarding this or other tax planning or business ideas, please give me a call at 240-356-5050.

To Your Financial Health!