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PalletCentral • September-October 2020 25 business's average annual gross receipts in the three prior years can't exceed a set dollar limit ($26 million in 2020). Capital Equipment Buying trucks? Automating your warehouse? Current tax rules enable you to take sizable write-offs up front. Financing a purchase in whole or in part has no impact on deductions; write-offs depend only on the cost of the equipment. You usually have four options when you make a purchase: 1. Basic depreciation. This means writing off the cost of the item over its recovery period (a set number of years fixed by law). For example, if you purchase five-year property – a desktop computer – the depreciation deduction in the first year is 20 percent of cost. Robotic equipment is seven-year property, so the depreciation allowance for the first year is 14.29 percent. 2. First-year expensing. You can elect to deduct equipment purchases up to a set dollar limit ($1,040,000 in 2020). However, you must be profitable to benefit from this option. And if your total equipment purchases exceed a threshold amount ($2,590,000 in 2020), the dollar limit is reduced by one dollar for each dollar of equipment cost cover the threshold amount (i.e., no expensing in 2020 if your total equipment purchases exceed $3,630,000). 3. Bonus depreciation. You write off the entire cost of eligible equipment bought and placed in service in 2020 unless you choose not to use this option. For example, robotic equipment can be completely deducted if you buy it and begin to use it this year, regardless of cost. Note: This 100 percent bonus depreciation option is scheduled to phase out starting in 2023. 4. De minimis rule. This rule, explained earlier, allows up front deductions. But you can't add the equipment written off under this rule to your balance sheet. Details on depreciation and other write-off options are explained in IRS Publication 946 (www.irs.gov/ pub/irs-pdf/p946.pdf ). Special Rule for Vehicles While vehicles are certainly business equipment, tax rules are different. You can opt to deduct the cost of operating business vehicles by relying on an IRS standard mileage rate (57.5 cents per mile in 2020). This rule applies whether you own or lease the vehicle. But if you choose to deduct actual costs, which Small businesses can opt to treat inventory as non-incidental materials and supplies. Re-visit Your Budget for the Year Many businesses plan ahead for their annual acquisitions. Yet the fallout from COVID-19 has changed the landscape for many companies. In some cases needs have been reduced and, in others, increased. Before you go on a spending spree: • Check your budget. What have you already budgeted for supplies and purchases? Your budget may provide flexibility for additional needs. • Consider financing. Today's historically low interest rates make it attractive to finance purchases that are needed. Of course, debt serve must be factored into the budget. • Meet with your CPA. Talk about how tax breaks described next can be used to help you obtain what you need and want. Materials and Supplies There are various classes of materials and supplies. How they're classified determines their tax treatment: • Incidental materials and supplies. These are items for which no records of use are kept and no inventory of them is taken at the beginning and end of the year. Incidental materials and supplies include paper clips, staples, and other such office supplies. The cost of items you buy during the year can be deducted immediately. • Non-incidental materials and supplies. These are items expected to last more than one year and for which you keep a record of consumption or inventory. An example would be spare parts for your equipment. There are four options for deducting the cost of these items: 1. Take a deduction when the item is consumed. 2. Capitalize the cost (add it to your balance sheet) and claim depreciation. 3. Use an optional method for certain types of non-incidental materials and supplies. For example, there are special rules for rotable spare, temporary, and standby emergency parts 1 . 4. Elect a de minimis rule 2 that allows you to immediately deduct the cost within limits. For small businesses (those without audited financial statements), the de minimis rule is $2,500 per invoice. This option requires you to attach an election statement to your income tax return. • Supplies used directly or indirectly in the manufacturing of goods. These are part of the cost of goods sold. They are factored into inventory costs and are not separately deducted. However, small businesses can opt to treat inventory as non- incidental materials and supplies. To do this, the

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