I just returned from the annual AED meeting in San Antonio, TX. All in all, it was a great trip. It's a very nice town for a convention and the audience was upbeat across the board. And if the AED convention audience is upbeat, I guess the readers of this column have to be, as well.
As part of the convention process, AED holds its annual Board Meeting. The Board is made up of dealers from all regions of the country. Each member is asked to make a few comments about business conditions in their region. Except for the Detroit area, all persons reporting expected a better year than 2004. Folks, 2004 was not bad at all.
So now that we have figured out that construction equipment dealers expect you to replace all the equipment you have been wearing out, the only thing you have to do is agree with them and everybody's happy. So what do you think? Are you going to do it?
Replacing equipment when business is good sounds like a reasonable idea. If you can rid yourself of high-maintenance or under-utilized units, get a good price in the market or as a trade and be more efficient in the process, you have to go for it. And while the big tax deferrals have flown the coop, there are still things you can do to get Uncle Sam to foot some of the bill.
What to look for in 2005
Check to see that your accountant used bonus depreciation in 2004, if you qualified for it. If you didn't and paid taxes, amend the return and get your refund.
Also check to see that your accountant is using the appropriate useful life and method to depreciate your equipment fleet. Most of the units you own qualify for a five-year life using MACRS (an accelerated write-off schedule). If you're using different rates, look into it.
Be aware that you can take a Sec 179 deduction of approximately $100,000 as long as you qualify. In other words, you can purchase new or used equipment and write it off up to $100,000 as long as your total additions for the year do not exceed $400,000.
After $400,000, for every dollar spent on acquisitions, the $100,000 deduction is reduced on a dollar for dollar basis. When you hit $500,000 in additions, the Sec 179 deduction is no longer available. You also cannot use this deduction to create a tax loss. In short, it pays to plan out your capital spending program and know your tax position.
Here is a hint --if you start to bump up against the $400,000 limit, rent or lease any remaining units you need for the balance of the year. As long as they are operating leases, you are straight with the IRS.
If you don't trade equipment in, consider using a 1031 tax free exchange transaction to defer tax gains on the sale of used equipment. After five years, most assets have zero tax basis and every dollar you get as sales proceeds generates taxable income. A 1031 deal gives you the same benefit as a trade-in for tax purposes. Why pay the taxes when you don't have to?
Go through that equipment fleet and make the tough decisions to get rid of under-utilized equipment. Used prices are firm right now, so this is the time to act.
Interest rates are on the move
A real good reason to buy now, if it is in the cards, revolves around expected changes in interest rates. Speakers at the convention all expect a 1.5 to 2.0 short-term rate increase and a jump in long-term rates, as well. It is time to review all your financing to see if you can refinance your loans and give yourself some capital to buy equipment at rates lower than those charged by finance companies. Not everyone can do this, but it sure makes sense to do so if you think you can. There is a lot of money out there, and the banks are back to wanting your business.
The fly in the ointment is the lack of equipment available to purchase. The supply is tight and could remain so until vendors catch up. Pay special attention to delivery dates, or get a package to provide the equipment you need in case your new equipment does not show up.
The housing market may slow down some, but a major swing is not anticipated. This will differ by region, of course.