One of the topics we normally discuss with our clients throughout the year is how to reinvest current year profit into the company by purchasing labor saving equipment. The rationale is the labor saving equipment will generally increase future year profits while creating a current year tax write-off from depreciating that new equipment.

For example, if a client purchases an ATV with a cost of $6,000, the client can elect to write off 100 percent of the cost of that ATV in the current year – a write off known as Section 179 depreciation. With Section 179 depreciation you can elect to write off up to $500K of the cost of new equipment purchased in 2017. These limits change periodically, so consult with your tax advisor for changes. If the business is a flow-through entity, such as an S Corporation or an LLC and the owner is in a 35 percent federal tax bracket, he/she will save approximately $2,100 in federal income tax. Additionally, the owner will save state income tax. At Colorado’s 4.63 percent state income tax rate, there is an extra $278 tax savings.

Assess beyond the write-off
Getting a write off is not a stand-alone consideration. We tell our clients it’s usually not a good idea to buy equipment solely for the purpose of a write-off. The equipment purchase will reduce cash or create a new monthly payment, and the tax benefit is only a percentage of this total cost.

One way to determine if it is time to replace equipment is to track the repair and maintenance costs by piece of equipment. Tracking in this way allows you to see what those costs are at any time during the year. If they are increasing from one year to the next, it could be a good indication that the equipment is near the end of its useful life.

Labor versus equipment: What’s the best balance?
Industry data suggest that a landscape services company with annual revenue between $1-10 million should have direct labor costs, as a percentage of revenue, somewhere between 27-30%. If your labor costs are higher than this average, it could be a sign that purchasing additional equipment may lower these direct labor costs by making employees more productive and efficient.

As we have seen in the past couple of years, there has been a shortage of qualified workers. This challenge is not specific to the landscaping industry but is a problem in all of the trades. The worker shortage makes it even more important to ensure that equipment is purchased and in place so it increases the revenue generated per employee and reduces down time and repair expenses common with older equipment.

During the slower time of your annual business cycle, if you determine that new equipment is needed, there may be cost benefits to buying in bulk—snow throwers or mowers, for example—and receiving an early purchase discount.

Plan and budget for equipment
When planning your annual budget, it is a good idea to consider including an annual replacement cost of equipment. Planning ahead helps spread the expenses over a period of years so you are not hit with extraordinary equipment expenses in a given year. A line of credit established with your bank ahead of time could also help facilitate managing these costs during slow times. Also, consult with your tax advisor regarding the pros and cons of leasing versus purchasing your new equipment.

Proper planning and replacement of equipment should be an ongoing conversation between management and advisors. This is one area that can generate both increased effectiveness and profitability while at the same time minimizing taxes.

Briana Reidle, CPA and John Schrote, EA, can be found at Accounting & Tax Solutions, Inc., Lakewood.

This article originally appeared in the September-October 2017 issue of Colorado Green magazine.

Read more in this issue of Colorado Green NOW:
VIDEO: The Hidden Value of Landscapes
Best of Houzz 2017 includes some of ALCC's best
NALP update on H-2B and call-to-action
2017 Colorado Landscape Industry Certification recap