Year-End Strategies for Small Business Equipment Financing

Careful planning can help you get the most value from your capital expenditures.

As a business owner, you'll frequently need to refresh your company's essential tools, software and equipment. But deciding to buy often depends on your financing options and eligibility for small business tax deductions. In fact, strategically timing these purchases can significantly impact the financial performance of your business.

Why year-end planning matters

Whether it's machinery, vehicles, technology or office furniture, the cost of acquiring necessary equipment could quickly run into the thousands—or hundreds of thousands—of dollars. These purchases can be a serious strain on your company's resources, so it's important to approach these purchases with an eye toward saving when possible. For many, it can be beneficial to make these investments before the year concludes.

"You have two situations that drive capital expenditure needs," explains Bob Radford, director of equipment financing and leasing at First Citizens. "You have those who have to buy or replace the same equipment every year and those who are making a significant investment in something that's new to them."

Key considerations when making purchase decisions

One of the first things you should do when considering a large investment is evaluate whether the purchase is financially sound. Ask yourself whether the new equipment will lead to increased revenue or introduce new efficiencies. Getting specific by calculating the amount of revenue or savings the equipment will generate over a designated time can help you determine your return on investment, or ROI.

Another factor to consider is timing. Here's why you should think about making purchases by the end of the year.

• Year-end holidays are often an opportune time to find deals on technology products.
• Car manufacturers release new models in the fall, so dealerships are typically more willing to negotiate or offer incentives on vehicles from the previous model year as they make room for new stock.
• The end of any month or quarter can be a good time to shop for vehicles or other large items because dealers might be trying to reach sales goals or quotas.

Your choice of supplier or vendor might also be an important part of your strategic purchasing plan. You'll want to work with a stable, dependable company with excellent communication and customer service. If you can build a strong relationship with your supplier, you might qualify for special promotions or other valuable incentives.

How to get the most from year-end small business equipment financing

Even with discounts, incentives and promotions, your company might still need to make significant capital expenditures that could exceed available cash. That's when you'll have to explore other purchasing strategies.

Consider financing options from your banking partner

Explore financing options with your banker. "We want to work with our bank customers and advise them on all available options," Radford says.

He explains that getting a loan to pay for a purchase is one approach, but it requires putting collateral down and requesting a set amount of money. Another approach would be to get preapproved for a line of credit, which offers businesses more flexibility around purchasing decisions.

Radford suggests setting up a credit facility early in the year because it can take a while to approve a customer for a large loan. This way, you can act on purchase decisions sooner and avoid a year-end crunch.

"When you're out shopping and you find a piece of equipment, you know you have that credit approval locked in and ready," he says. "And we can typically generate closing documents within 24 to 36 hours."

Take advantage of the Section 179 tax break

As you develop your strategic purchasing plan, you should also consider specific tax code provisions that could help make capital expenditures more financially palatable.

For instance, the Section 179 deduction is one of the biggest small business tax deductions available. It makes capital expenditures more financially feasible by allowing businesses to immediately deduct 100% of the cost of qualifying purchases—rather than capitalizing and depreciating those assets over a longer period.

"I think this is one of the most impactful savings available to business owners when you consider that most companies are faced with capital expenditures every year," Radford says.

There are certain requirements and restrictions of the Section 179 deduction, though. For example, total deductions can't exceed net taxable income from all business activities, including wages.

In addition, only certain types of purchases are considered qualifying expenses. Purchases of new or used machinery, equipment, furniture, software and business vehicles qualify, but real estate and intangible assets like copyrights and patents don't.

Best of all, using the Section 179 deduction doesn't preclude you from using another popular tax code provision—bonus depreciation—for an additional first-year depreciation allowance. "The real beauty is when you can take the Section 179 limit, and then anything left over after that write-off is eligible for bonus depreciation," Radford explains.

Be aware, though, that bonus depreciation is currently scheduled to phase out by 2027, so now is the time to take advantage of this extra tax break if it makes sense for your business strategy.

Remember that time is of the essence

If you expect your business revenue to increase dramatically in the upcoming calendar year, you might be tempted to wait and claim a deduction or small business tax credit once you're in a higher tax bracket. Radford cautions against this approach, especially given uncertainties in the market, from the economy to potential legislative changes.

"If you buy a piece of equipment now, do you want to spread out the deduction over 7 years? Or would you rather take the full deduction now and save money today?" he asks. "Given that choice, most business owners prefer to save it immediately."

And speaking of timing, do your shopping early. To claim the Section 179 deduction for a purchase, the equipment must be delivered and in working order by the end of the year.

"If you think you can wait to November to order a significant piece of equipment and hope it's going to be installed and operational by December 31, you may be in for a surprise," Radford says. In other words, year-end tax planning for small business owners should start well before the last few months of the year.

Get expert advice

Many elements go into a strategic purchasing plan, and you'll likely need to speak with several people when putting it together. Start with your internal team to determine your anticipated purchasing needs for the year ahead, as well as your company's financial position. Then, talk to your external team of experts to draw on their financing and tax law expertise.

"Be proactive and use your resources, including the contacts at your bank as advisors," Radford says. "We love having these trusted relationships and being a part of strategic decisions. The knowledge we can share with our clients is important."