Reduce Your Screen Printing Shop's Taxes: Section 174

[printavo]

From Mike Chong at Merch Monster in Oakland, CA:

It's the end of November, and the year is almost over. Time to get your taxes in order.

Hopefully your screen printing business did really well this year. You made a whole bunch of money.

Well, if you made a bunch of money – you've got a good problem: you owe the government a bunch of money!

I've been facing a projected tax liability of around $20,000 according to my profit & loss statement and projected net profits. So naturally, I've been scrambling to figure out how to reduce my tax liability.

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Reducing Your Shop's Tax Liability: Section 179 vs. IRA/401k
I've learned that there are a couple of solid ways to reduce your taxes.

The first is to leverage Section 179 – commonly known as the R&D tax credit – and buy new equipment for your shop.

The second is to contribute to your IRA or 401k accounts.

Personally, I'd much rather buy new equipment. Why?

Because IRA & 401k contributions – while great – reduce your available cash. Every business survives on cash. As the old adage goes:

Cash rules everything around me.

Actually, it's "cash is king," but I can't resist a little Wu Tang reference.

Winner: Section 174
If you're contributing to your IRA or 401k, the cash that you've contributed will be tied up in those accounts until you're almost 60 (unless you want to pay a huge penalty for early withdrawal, which eliminates the whole point of this exercise).

For me, waiting until I'm 60 might as well be a lifetime! That's money I can't use to pay bills. Worse, it's going to reduce my available cash going into the slowest time of the year (winter is coming).

Secondly, I can really leverage financing the new equipment to be favorable to my cashflow:

Initiate financing new equipment for a few thousand dollars
Get a ~$20,000 tax break
Wind up with a few thousand dollars in cash from my tax return
Yes, I'll have to continue making payments on the new equipment. But – that equipment will pay for itself quickly (and then some).

Make Your Cash Work For You
By using financing, I'm basically letting the finance company and the government invest in my business – and wringing more value out of my cash.

The equipment will help you to generate more revenue in the coming year, which in turn allows you to continue leveraging Section 174 to keep investing in your shop.

See Your CPA
This is not legal advice and I'm not an accountant.

It should be obvious, but you need to consult with your CPA about your specific predicament if you're facing a big tax burden & aren't sure how to deal with it. Only they can evaluate ways to make your money work for you.

Don't get crushed by a big tax bill: get the right advice for your shop!

Watch the full video here: https://www.printavo.com/blog/reduce-your-shops-tax-liability-section-174

[blue moon]

this needs a little bit of clean up. . . It is correctly listed as section 179 on the top, but referred to as 174 later.
179 is for equipment purchases and 174 is RnD credit (which would not apply to most of us).

'something to remember, if you take a 179 deduction, you will not be able to write off some or all of the payments you are making on the equipment. In other words, you are shifting the tax payments to later years. Make sure you can afford to pay them when they are due. A downturn in the economy and/or lower sales could cause issues there.

pierre

[mk162]

Pierre is correct.  If you don't want to finance the equipment to take a write-off in the same year you can lease it, which will give you a steady expense to put against profit for each year of the lease.

We've done both depending on circumstances.  I do prefer to Section 179 the equipment.

This is the reason to have a CPA.  Ours is $750 to file our personal and business and he takes email questions anytime without charging me for them.  That is money very well spent...a small screwup on taxes can cost you big time in what you pay or don't pay for the year.

[ZooCity]

I will third the correction regarding sec.179. 

All this allows is for you to capture your depreciation value at one time versus depreciating the asset normally.  Deferral can be part of an overall approach to managing your basis but, assuming your not dead before it happens, you will eventually come to that can of taxes you have been kicking down the road.

And heck yes it is your CPA who should guide you on this, not you, unless you happen to be a CPA and a print shop owner.   We pay what feels like a lot for that service, ≈3500 annual, but the guidance saves us more than that every year.  As a case in point, we just passed through an IRS field audit without penalty. 

I do like the notion of keeping your cash around in the business though.  I bootstrapped mine and am accustomed to putting every penny back in.  This changes a bit as one ages I notice....

[merchmonster]

Thanks for the catch folks; sorry for the typo. Yes, its 179.

"Make sure you can afford to pay them when they are due. A downturn in the economy and/or lower sales could cause issues there."

Definitely, I'm not just advocating spending for the sake of spending.

The two things we bought were a Sprint 3000 and a Roland 64" printer, and I wanted to make sure our purchases would be ROI positive. The gas dryer will save us money vs electric, increase output. The Roland is a new revenue stream / headache / thing to learn

I looked at a few other things like EcoRinse, EcoTex, etc that I didn't think would be ROI positive for us right now (volume too low). We are over capacity on print machines also, so we didn't add there either.

"If you don't want to finance the equipment to take a write-off in the same year you can lease it, which will give you a steady expense to put against profit for each year of the lease."

Correct, but depending on how you are withholding tax, you can end up in a bind that leasing won't solve. We jumped from negative to 6 figure profit in one year, because quarterly withholding is estimated based on prior year income.

So I was in a big bind where I needed to write down a large amount or come out of pocket tens of thousands. Lease can't help me in this situation. So I spent $5k, got $20k knocked off my tax bill, + $5k return, paying $1.8/mo for two items that will be revenue generating / expense saving.

"And heck yes it is your CPA who should guide you on this, not you, unless you happen to be a CPA and a print shop owner. "

I agree that owners should seek professional financial advice. I would liken this to the flyer that I got from Geneva telling me about 179, they are not a CPA either.