The Associated Equipment Distributors (AED) titled its September 2008 Executive Forum "The Perfect Storm" to represent how equipment manufacturers and dealers are getting hit with multiple negative forces at this time. The housing fiasco, combined with the credit crunch, eliminated a lot of construction work. This in turn reduced dealer equipment sales, increased inventory levels and even reduced the parts and service business. Even contractors who wanted to buy equipment found it difficult to cope with credit providers. Add to that 7% to10% price increases starting this Fall, and you have the "perfect dealer storm."
We all know that one person's problem is another's opportunity. In this case, dealers' problems are your opportunity to upgrade your equipment fleet at their expense. If your business is surviving, and solvent, and you know you will be replacing equipment within the next two years, you should take a very hard look at doing it now, before the end of 2008, because of all the opportunities. Not only do you have the supply and demand cycle on your side, credit for equipment purchases is easing and the IRS is providing tax benefits you may not see again for many years.
Negotiate price and financing
Equipment is available with better than average delivery terms. You want it and, in most cases, you can get it at very competitive pricing.
Of course, pricing should not be your sole determining factor when placing an order, because dealer support is very important, as well. Negotiate hard, but select the best overall deal from the dealer that will help keep the equipment up and running.
On the financing front, your bank or the dealer's financing sources should offer better terms than they were six months ago. You can buy the equipment outright or lease it, though it would probably be in your best interest to lock in an interest rate, since inflation will cause rates to increase. Negotiating the financing should be part of the purchase exercise, and you should expect dealer assistance if it is warranted.
How to secure stimulus benefits
So far so good regarding the equipment purchase. But the IRS piece is not so simple. In order to get the Tax Stimulus Package benefits, you have to order and take delivery of the equipment in 2008. However, equipment that needs to be manufactured may not be deliverable by the end of the year.
There are two segments to the tax benefits. The Section 179 segment applies to both new and used equipment. The Bonus Depreciation segment applies to new equipment only.
Section 179 allows for a 100% write-off of the equipment cost. However, if you purchase more than $800,000 of depreciable assets (all asset categories), you start to lose the benefit, dollar for dollar, on any purchases over $800,000. Doing the math, this means you lose 100% of the 179 benefit after $1,050,000 of 2008 asset purchases.
Bonus Depreciation only applies to new equipment purchases placed in service in 2008. The regulation allows a 50% bonus feature, along with the normal MACRS depreciation on the balance ? so, a 60% potential write-off related to Bonus Depreciation only. (See the April 2008 Running the Business column, "Incentives to Spend", for details.)
Between the two tax segments, you could obtain a tax deduction of between 60% to 100% of 2008 equipment purchases to be applied against 2008 taxable income, carried back to a year where you paid taxes or carried forward to use against future taxable income. The tax planning opportunities are numerous if you plan to maximize these benefits.
Like to try the equipment before you buy it? Well, that works, too. The Tax Stimulus Package allows a rent-to-sell transaction to qualify, as long as the purchaser is the first one to use the equipment, and the rental contract in no more than three months in length.
The tax portion of the benefits is being presented again to remind you that the purchases and delivery have to occur in 2008. There is pressure being applied to Congress to extend the program, but as of now the original program is still in place. If you still plan to buy, you should do so as soon as possible to ensure timely delivery, and to avoid the pressure of trying to find the unit you want in December.
Time to take advantage
In summary, those of you who plan to upgrade your equipment fleets within the next two years should give serious thought to buying now, because:
- pricing is attractive now;
- you avoid the 10% price increases;
- attractive financing should be available to qualified customers;
- you have Section 179 and the Bonus Depreciation available.
As a side note, the standard 179 and MACRS deductions are $125,000 and 20%, respectively.
The dealer's perfect storm could be your pot of gold. Think long and hard before you let this storm pass you by.
Garry Bartecki is director of dealer/distributor services at BDO Seidman, LLP of Chicago, as well as a consultant to the AED. He has also worked as an independent CPA and consultant to equipment dealers. He can be reached at (312) 616-4677 or firstname.lastname@example.org.