I recently split up my partnership and am wanting to find out what the best way to go for tax purposes are. I was in a partnership for 7 years, and before years end we split.

What would be the best way to go for a machine shop that only has one employee? I make about 200,000 to 250,000 a year. I would like to buy a machine this year. Is the machine considered an expense? I know that I can depreciate it (how does that exactly work), but can I actually count the machine as an expense? Meaning, if I buy a 100,000 machine, would I have to pay taxes on the money used to buy the machine? How about tooling, is that considered and expense?

I think what I need to do is find a good accountant. My current one can't explain anything in laymans terms...and when he tries he charges me an arm and a leg. I have many questions, and wish I could find someone to talk to about them.


Thanks

Jimmy

I had a nice pdf on write offs - but have mislaid it - hope I don't need it for an audit! ;)
Try these:
http://www.google.com.my/search?q=tax+write+off+cnc+machine&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

"tax write off cnc machine" seems to be a good start - lawyers and accountants --- ughh.
:cheers: Jim

I had a nice pdf on write offs - but have mislaid it - hope I don't need it for an audit! ;)
Try these:
http://www.google.com.my/search?q=tax+write+off+cnc+machine&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

"tax write off cnc machine" seems to be a good start - lawyers and accountants --- ughh.
:cheers: Jim

The initial purchase price of an expensive machine is most often not written off in one year. Usually, when things are referred to as 'expenses', they are 100% written off in the same year of the purchase.

A machine is an asset until it has depreciated to zero value. But the government will allow you to depreciate it by a certain amount each year. This depreciation allowance is your allowable 'expense' for that machine each year.

So as an example, if you bought a machine for $100k, and made $100k with it, you would be taxable on about 30% of $80k (profit), because the depreciation on the first year's use of the machine might be only 20% ($20k).

Typically, over perhaps 5 years, your depreciation allowance will allow you to depreciate the machine value down to zero, so you do get to expense the full price of the machine eventually.

However, if the machine is still working after 5 years, you might want to sell it. You might get $20k back on it. This would be recapture of depreciation, and represents taxable profit for you. But, since you might be buying another new machine at that time, you'll be able to use the current year's depreciation to offset the recapture.

When you finally retire, and sell all your depreciated, worthless junk for a few bucks, that's when the tax man gets his final stab at you :D

Meaning, if I buy a 100,000 machine, would I have to pay taxes on the money used to buy the machine? How about tooling, is that considered and expense?

There are differences between Canada and the US but I they they are related more to how fast you can write things off.

With machines you can only deduct a portion of the purchase price per year; here it is 15% in the first year and 30% per year after that, there I think the percentages are higher. Machines are considered Capital purchase; they have a continuing value.

With tooling, which is a consumable item that does not have a continuing value, normally the fuul cost is deductable in the year of purchase.

You really do need an accountant who does not baffle you with bovine waste products.

And if you have recently split up a partnership a chat with a lawyer may be a good idea; you want to be sure the partnership is really and truly split.

And it does cost an arm and a leg but not taking that hit now could mean you lose more in the future. Pessimistic advice but I know people who have become embroiled in nasty money wasting disputes because the i's where not dotted and the t's crossed correctly.

In the US, there is the Section 179 deduction. A quick google search led me to a page (http://www.irs.gov/formspubs/article/0,,id=109879,00.html) that tells me such deduction has been increased to $125K.

This means that you can write off $125K of capital expenditures for the year you placed the equipment in service. That's the good news. The bad news is that some states (at least Connecticut) don't give you the same deduction. So you'll still get hit with state tax.

I am not an accountant, nor do I play one on TV.

Ken

The US tax code is written with the assumption that a "real" business will be structured as a "c" corporation, with stock, and the flexibility and benefits provided by having your business in a c corp vs any other structure is easy to under estimate. This also keeps the liability of the corporation separate from your personnal assets in case someone decides to sue you. (we think a lot about that here in CA)

It does not take a lawyer to set you up as a c corp - my wife and I have a business (Business Development Consulting) and we did the whole thing ourselves including sales licenese, etc. It took a bit of time, but it has helped us a lot. As a general rule, I don't help people to set up their companies, so I am not out looking for business doing this - just telling you what I did. Depending on what state you are in, just look at their web site and visit the office in charge of setting up corporations. It is perhaps the friendliest of all government offices.

Believe it or not, the hardest part for us was choosing a name that was still available as a .com or .net . You can be pretty sure that if a domain name is available, then there is not a company with the same name out there. Lock that up first, then file the paperwork with the state.

There is one other benefit to having a "c" corp with stock that is not always so apparent - financing. If you are the only owner of a company, then you really can only borrow to put more capital into your business. If you have a company with stock, then if you need capital for an expansion, you have the option of selling some shares to others (family, vendors, customers) who sometimes are willing to make a strategic investment to help you succeed - so they can succeed as well.

Control still remains with the largest share holder - you.

Hi - one more point that really pushed me to form a c corp - accounting / tax prep. At least around here, it is difficult to find a tax guy that really can do a good job of dealing with both personal and business mixed tax prep. It can be done, but it is expensive.

When I split my business off as a real entity, it was much easier to find a reasonably priced accountant / tax prep guy for the business taxes, and my personal taxes became so simple I could just do them myself.

One more hidden benefit about having a company, you can designate when your tax year ends. I suggest making it end either at the end of calendar Q2 or Q3, because it is a lot easier to get real tax / accountant help then rather than in March / April during the rush, and you can more easily plan how your business vs personal taxes will come out.

Harry,

I can't believe you are having that much trouble finding a good accountant. If they can't explain it laymens terms look at one of the books for dummies to start. If you are making $200k a year and didn't initially know that machine could be depreciated then your not understanding taxes is really hurting you. It's unbelievable how much can be wrote off as an expenses, when you really delve into it, and you've probably missed some things that could have worked to your advantage when it came to taxes.

Just getting one of the Money or Quicken programs should help immensely, but it sounds like you really should do some reading up on this stuff. Accountants can tell you what can be wrote off, but they usually only give you a yes and no answer they won't get into all the things that could be wrote off.

One thing I do recommend is get a "real" accountant not the H+R Block kind. We switched last year and I was much happier with the service I was getting.

Hi Matt, I guess you are replying to conceptmachinin. I have a good accountant and spend too much time reading about taxes for my own good. That is why I recommended he consider splitting his business off into a C corp.

Edit - BTW - My brother is a decent machinist, but I would not ask him tax advice. Now how to make something - that is a different strory. We all have our strengths and weaknesses.