Get the Timing Right

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What deductions you're able to take is not the only consideration. It also matters when you take them. With taxes, as with so much else in business, timing is key.

Scott Kelley, 47, is a co-founder of Service Center Metals, based in Prince George, Va. His company makes aluminum rods, bars, and other pieces that get turned into everything from chopper handlebars to putter heads. Kelley's old-line manufacturing company bears scant resemblance to an accounting firm. Still, he thinks about tax strategy with the kind of precision most owners reserve for, say, pricing.

Service Center Metals uses expensive equipment. Writing off such major purchases usually takes years and must be done in accordance with depreciation schedules laid out by the IRS. With the help of a canny accountant, the company has found ways to accelerate various deductions, which allows it to get more money more quickly.

In 2005, Service Center Metals purchased a $500,000 air compressor that typically would be considered part of its factory building, requiring a 39-year depreciation. The firm's CPA documented for the IRS that the compressor is actually used in the manufacturing process - not merely part of the building - making it possible to depreciate it over just seven years.

Service Center Metals owns two aluminum extrusion presses, one dubbed Elvis and the other the Boss, after Bruce Springsteen, whom Kelley has seen in concert more than 50 times. Pricetag for the presses: $11 million. The firm's CPA provided the IRS with careful documentation on how the presses are used, which allowed the company to write them off faster. All told, accelerated deduction yields hundreds of thousands of dollars to Service Center Metals each year and helps fuel the five-year-old company's growth: from $45 million in 2005 sales to $145 million in 2007. Profits in 2007 were up 40% over the prior year.

"From the very beginning, we've tried to align our growth strategy with tax strategy," says Kelley. "Get money back quickly, use it to fund expansion and buy better equipment, make more money."

Your company may not be in the habit of buying heavy machinery. As it happens, there's a fantastic tax benefit for less capital-intensive businesses. It's called Section 179. For 2007 you can take an immediate write-off on as much as $125,000 worth of equipment. The definition of equipment is loose enough to include everything from computers to lighting fixtures to bookshelves. To qualify for the whole Section 179 deduction, your company must have made less than $500,000 in equipment purchases during the year. Above $500,000, the benefit phases out, dollar for dollar.

Say your company spent $5,000 in 2007 to purchase two new computers. Ordinarily the IRS requires you to write them off over five years. The IRS has an excruciating publication, No. 946, that lays out depreciation schedules for everything from tractors (three years) to tugboats (ten). But under Section 179, you could take the full write-off right away. "If I offered you $5,000 now or $1,000 a year for the next five years, which would you take?" asks Tom Ochsenschlager, VP of taxation for the American Institute of Certified Public Accountants, a professional association based in New York City.

Of course, sometimes it makes sense to spread a deduction out. If you've had a lackluster year, a big, immediate deduction may not make sense. If you are posting a loss, extra deductions are worthless in that year. In such cases, you might want to depreciate your purchases, reserving write-offs for future - and better - years.

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