You need to make the most of your purchasing dollars when you buy equipment for your business. Ways you can save money include buying used equipment and negotiating your purchase price and finance terms.
If you're going to invest your precious business capital in purchasing equipment, you want to be absolutely sure that you do all you can to get the best deals for your money. You can go a long way toward achieving this goal by simply taking the time to comparison shop. But there are also a few other not-as-obvious factors to consider before you make that purchase:
- Used equipment can save you money.
- Negotiation before you sign the sales contract can also bring savings.
- Financing is frequently available for equipment purchases.
- Tax incentives for purchases may help bring your costs down.
Saving with used equipment
As you shop around for equipment deals, don't overlook the used equipment market. Depending on the item, you may be able to purchase used equipment for a fraction of what you would have paid if the equipment were new and without any loss of functionality. Purchasing used office furnishings, in particular, can lead to big savings.
Three owners of a computer repair business were able to fully equip their workspace with high-quality desks and chairs at a cost of $20 per item when the university they had attended remodeled its offices.
How and where can you find high-quality used equipment? Start by checking the listings in the Yellow Pages or online for thrift stores and secondhand dealers. The classified sections of your local newspaper and trade publications are another good place to look, as well as online marketplaces. Be especially watchful for sales related to an office remodeling or business liquidation. And as more people get into — and sometimes out of — home businesses, yard and estate sales may also provide bargains to those with the time and patience to seek them out.
Occasionally, you may come across used equipment that is still covered by an original warranty or service agreement. However, before you take comfort in the potential protection such an agreement may provide, read through it to confirm that its benefits are in fact transferable to you with the equipment.
Negotiating and financing business equipment purchases
Negotiating for the best deals on equipment and obtaining favorable financing for purchases you need to make are two ways you can save a substantial sum when purchasing equipment for your business.
How to get the best price
Unless you're in the position of having had a vendor immediately agree to sell you the specific equipment you want for the price you're willing to pay, you're going to have to negotiate.
What you want vs. what you're willing to pay. If you've gone through the initial exercise of determining what you want and need and what you're willing to pay for the equipment and its various features, you'll have a head start on the process. This is because you'll have an idea as to which features or conditions are most important to you and which you may be willing to concede to reach an acceptable compromise. At the very least, establish in your mind what your minimum requirements are, and be prepared to walk away if you're not comfortable that the deal being offered will meet your needs.
Negotiating for the best deal. As you proceed to negotiate your best deal, try to be fair and cordial. Keep in mind that your vendor also is a businessperson who must turn a profit to survive. Especially if you expect to have future dealings with the vendor, whether in connection with your use or the servicing of the equipment or with future purchases, you don't want to push so hard that you end up souring your business relationship.
Even if a vendor starts with an offer that sounds acceptable, you won't lose anything by at least trying for an improvement in price or terms. Given that most everything in business is negotiable to some degree, simply inquiring whether the offer is the best the vendor can do may lead to some pleasantly surprising results.
Financing equipment purchases
Unless your business has unlimited cash reserves, chances are that at some point you're going to have to finance an equipment purchase. In fact, even equipment that you purchase for cash is in one sense financed, if you end up borrowing to meet other needs because the purchase depleted your working capital. So, you really should view equipment financing as just one piece of your overall financing strategy for your business.
Comparing financing options. If you anticipate financing an equipment purchase, compare the credit packages offered by your bank, independent financing companies, and the equipment's manufacturer and vendors. These packages can vary greatly in terms of down payment amounts, interest rates, loan durations, security requirements, late payment charges, and similar provisions.
Collateral requirements. With respect to security requirements, make sure you understand what each package will require as collateral. Will the financed equipment be the only collateral or will you be required to put up other assets as well? If you must put up other assets as collateral, check your existing financing agreements to ensure they don't contain any restrictions on your ability to encumber those assets.
Restrictions on your operations. Apart from collateral requirements, carefully review any restrictions that the lender may propose to place on your operations. For example, the agreement may attempt to limit the amount that you can draw from your business as "salary," to require you to secure the lender's permission to further asset acquisitions, or to equate certain financial conditions (falling below a minimum cash balance, failing to maintain a specified working capital ratio, maintaining excessive inventory levels, etc.) with an "act of default." Honestly assess whether you can in fact successfully operate under any such restrictions before you sign the agreement.
Tax incentives for purchasing equipment
As you plan your equipment purchases, keep in mind that Uncle Sam will help you out by letting you deduct some or all of the equipment's cost on your federal income tax return through expensing or depreciation.
Expensing election
Perhaps the biggest tax incentive that's available is your ability to elect to immediately expense (deduct in the current year) the cost of certain equipment you purchase for use in your business. In other words, rather than having to recover the cost for tax purposes over several years via depreciation deductions, you can recover all or a portion of the cost on your return for the year that you start using the equipment in your business.
Depreciation
For tax purposes, you account for the equipment costs that you don't or can't elect to immediately expense through depreciation deductions. To encourage businesses to invest in equipment and other business assets, federal tax law may permit you to claim a greater percentage of an item's cost as a depreciation deduction during the earlier years of the item's use.
Bonus depreciation. Under economic stimulus tax law provisions, businesses are entitled to take an additional first-year depreciation deduction for certain types of qualified property before calculating their normal depreciation deductions.
Properly planning the timing of your equipment purchases can produce significant tax savings. For example, the equipment expensing election applies whether you purchase and start using a given piece of equipment during the first month of your tax year, or the last month.
So, if toward the end of your tax year you're contemplating a purchase of equipment, you may do well to complete the purchase and start using the equipment before the end of the year if you can benefit from deducting the equipment's cost on your current year's tax return.
Timing is also important for depreciation purposes. For the first year that you use an item in your business, you'll usually be allowed to claim six-month's worth of depreciation, regardless of when you actually start using the item. For this reason, there is some benefit to delaying your purchases until the last half of your tax year. However, you don't want to wait too long because if more than 40 percent of your purchases fall in the last quarter of your tax year, the rules change. The MACRS deduction for property is subject to the "midquarter convention." In English that means that if you place an asset into use in during the year, you compute the full year's depreciation and then multiply it by the following percentages, depending on which quarter it was placed in service: First quarter-87.5%, Second quarter-62.5%, Third quarter-37.5% and Fourth quarter-12.5%. Consult your tax adviser for further details as this can get very complicated.
If you're planning one or more major purchases, we suggest you have your accountant "run the numbers" so you can see how different purchase dates can affect your tax bill.
State tax incentives
The tax laws of many states track the federal laws, so you're likely to get the same expensing allowance or depreciation deduction on your state tax returns. You should also be on the lookout for other tax incentives. For example, your purchase of certain manufacturing machinery may entitle you to a state income tax credit or a state property tax exemption. Or, perhaps you'll be allowed to make the purchase free of state and local sales taxes. Consult your tax advisor or your state department of revenue for the most current laws in your state.