Capital expenditures, including those for computers, machinery, and other equipment, are critical to maintaining a company’s operations and ensuring its growth. For small businesses, in particular, buying new equipment can yield significant benefits.
Technology, engineering, and manufacturing trends change frequently. Working with equipment that's five or more years old can put companies at risk of losing their competitive edge.
Investing in new equipment, as well as leading-edge technologies, enables businesses to be more agile and responsive as business needs change. It also better positions them to meet the changing preferences and requirements of customers and end users. For some small businesses, new equipment also enables them to reach new customers and markets, and offer new products and services.
Investing in equipment that enables employees to work faster and reduces manual and repetitive tasks, can increase both efficiencies and overall productivity. The same applies to any new equipment that does more of what is needed, faster, safer, with better quality but with less waste, less maintenance, less resource usage, and less human interaction.
It’s important to note that those gains in productivity and efficiencies, as well as the drivers behind them, can also generate significant cost savings.
Older equipment, even when well-maintained, can present safety risks. If an employee is injured on the job, there could be significant expenses incurred due to worker's compensation and other costs.
Workplace safety also encompasses more than the physical safety of employees. Outdated equipment, including computers and servers, can leave companies at greater risk of theft, damage, security breaches, and cybercrime.
New equipment is more likely to incorporate more sophisticated technical and security controls and anti-theft features. Depending on the equipment, it may employ packaging or specific materials that help reduce the risk of damages stemming from environmental factors.
Some companies choose to lease rather than buy new equipment. Among the disadvantages to this option is that companies are at the mercy of the leasing company. They’re unable to make updates or changes to the equipment when needed unless the leasing company allows for it. They may have to wait on the leasing company to provide needed maintenance.
When a business purchases its’ own equipment, it can make modifications when necessary. The equipment can be sold if it outlives its service to the business, and the business also doesn’t have to abide by a leasing company's rules. Additionally, there are tax advantages that come with ownership.
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
In years past, when your business bought qualifying equipment, it typically wrote it off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it’s true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
And that’s exactly what Section 179 does – it allows your business to write off the entire purchase price of qualifying equipment for the current tax year.
This has made a big difference for many companies (and the economy in general.) Businesses have used Section 179 to purchase needed equipment right now, instead of waiting. For most small businesses, the entire cost of qualifying equipment can be written-off on the 2019 tax return (up to $1,000,000).
Businesses that choose to delay or avoid acquiring new equipment risk losing customers and contracts to competitors that do make the investments. New technology equipment can ease customers’ mind about data safety, while new industrial equipment can attract a customer due to increased speed or a wider range of capabilities.
It’s not just a matter of customer perception or a company’s reputation. Depending on the industry and company type, the lack of new equipment can make it difficult, if not impossible, to take on new work and provide the new products and services requested.
Older equipment has likely outlived any warranty and guarantee of support. Once a piece of equipment has reached this stage, businesses risk downtime or complete outage due to outdated or obsolete parts, which can be extremely costly. New equipment typically comes with warranties, parts replacements, and vendor support. When there’s a question or problem, help is a phone call, email or online chat away.
Investing in new equipment is a major undertaking for companies of all sizes. It can be especially precarious for small businesses. Before making any purchase decisions, businesses should assess their business needs and resources, and then review their options.
Leasing new equipment may be the right choice for some companies, while others may be able to hold off on doing anything with their equipment for a period of time. Others may find that making repairs or upgrades to existing equipment will suffice. Still others may opt to buy used equipment.
For those companies that do decide that buying new equipment is the way to go, there are still numerous decisions to be made. Equipment capabilities, lifespan, warranties, maintenance needs, and other factors also must be considered.
There’s also the question of how to pay for the equipment. A dedicated banking professional with deep knowledge of your industry can present a number of financial solutions and help you select the right tool for your specific needs.
To learn about financing options, such as small business loans, and other business banking services, visit our small business equipment lending page, or contact us today.