Should You Buy Equipment for Tax Write-Off? - Ep.054

Hey, everyone, this is Mike Andy and you're listening to the Landscape Business course podcast. I'm excited for a lot of reasons. Number one, we're gonna have a really good show today. I have a good question that I want to talk about. And the next thing is, because this Thursday, that's two days from today when I'm recording this, we are having a live webinar. It's free. It's 100% free for everyone listening to this podcast, if you haven't already, you're definitely going to want to sign up again. It's very easy to sign up. All you have to do is text the number 442221 word. Just text one word. Landscape business, no space in between. Landscape business, no space in between. To 44222. It's gonna be a great webinar. I've added a lot of things to it. I have no idea how long this is going to go. It really will kind of depend on feedback and questions and it comes to Q and A. But I am adding quite a bit of things to it. In addition to creating your marketing plan, we're gonna be talking about a whole bunch of other stuff. We're gonna be working through the workbook that I've created as far as getting out of the field and even if you're out of the field, what sort of responsibilities you need to hand off to people within your organization, and we're gonna have a workbook on how to do that, what the steps you need to take in 2018 are. I really look at this with webinar for everyone listening as kind of your strategy course, you know, jammed into, you know, a few hours that we're going to be on this webinar to really strategize for 2018, creating a strategy for your marketing, for really from a strategy standpoint, as far as your people making sure that you are working on the business and not in the business. And just so many different aspects that we're going to be going over everything from projections. We're going to be looking at your monthly projections throughout next year. Each month we'll be looking at what are the key performance indicators, KPIs that you need to be working on each of those months, what's gonna be the tipping points for each of those months, as far as what is gonna drive revenue. And so it's gonna be a great webinar. I really recommend everyone to get on there. And it's just I don't know exactly how long, like I said or exactly which Direction, I'll take it. It'll really depend on who shows up and everything like that. But so far there's about 100 of you that have signed up for the webinar. And so I will be sending everyone tomorrow that has signed up. Tomorrow evening you will be receiving the workbook. So please, please, please print it out and you will receive that via email, but please do print it out. If not, have it on a tablet or something like that that you can actually physically write on it or edit this, that document because it is a PDF. So you will want to print it out if possible so you can write out. We're going to be going over so many things and I want you to be filling them in and making it your own. And I don't want you to be. I want you to leave this webinar with a really inactionable plan for 2018 in several different aspects of your business. Everything from marketing, that's kind of what we're focusing on, and to your strategy from a people standpoint and where the business is going from a high level CEO kind of position. And so it's gonna be great. It's gonna be very, very good. Whether you're a course member or not, this is gonna be very beneficial to you. Obviously, if you earn the course, you're gonna have a lot of my thoughts on business in general already. And so this will be doubly amazing for you. But even if you're not in the course, this is still gonna be a great, great course. Sorry, a webinar for everyone out there, 100% free. Again, to sign up, all you need to do is text one word, make sure it's no space in between. It won't work. It's landscape business, one word, no space in between, and text that to 44222 and then it'll just send you a thing saying that it needs your email. And that's the email address we will send the workbook to, as well as the link that you will need to get into the webinar. So I'm crossing my fingers, hoping we don't have any sort of technical issues because I haven't done a live webinar for almost a month now. And so I know the service I use has gone through some updates and supposedly it's a lot better, but I'm hoping we don't have any issues. So I'm gonna be tomorrow testing that, making sure it's all good and hopefully everyone can get amazing value from it. Now, the second reason I'm really excited today is we got a good question come in that I wanted to kind of bring forward. I try to just bring the questions that are a little bit different or that represent a good amount of the questions that are coming in. So I am sorry if I don't answer your question on the podcast or if I just email you back or get back to you eventually like a week or two later. But.

I do try to answer the questions when they come in, every single one, if, if at all possible. And the ones that I put on the podcast are really just kind of a summary of the ones I'm getting. So if I'm getting a bunch on a certain topic, then I will put them on here. So this one, the reason I chose this one is because it's, it's really time relevant to what we are as landscapers going through right now. That's end of year. And so if you're talking to your accountant, which is a smart thing to do because we have a couple more weeks and you want to make sure you don't have any surprises when it comes to tax season next year. So I always recommend, especially in the first few years of business, when you are still working with your numbers, trying to get a better handle on your numbers, it's a good idea to talk to your accountant and get a really good idea of what your tax benefit or your tax expense is gonna be next year for income taxes, et cetera. And so the reason I say that is because I've been hit with a, you know, a many, many, many thousands of dollars tax bill that I did not expect. And it's definitely hindered a little bit of growth in the spring. Cause that's when obviously it's due. And so the last thing you wanna be doing is having an unforeseen expense come up in spring because you didn't manage the money correctly from an accounting standpoint. And what's interesting, as you'll see in this question from Cas at Mastercuts Lawn Management, what you'll see is a lot of times, especially in their first few years of business, you'll make money on paper in the business. And so you will owe taxes. However, you know, as a business owner that you've been pumping the money back into the business. And there really, it's not like you have tons of cash laying around. You don't have, you know, $200,000 in cash sitting around because you had a $200,000 on paper profit in your business. So let me read this question and let's see if we can get some learn something from the course. Member here is great cast actually joined a few weeks ago on the course and if you haven't Already go to landscapebusinesscourse.com and sign up for that and for the course, however she started, just started. I think she's. Yeah, it says she's in the second module. However I wanted to say something and that is the website for mastercuts lawn management is great if you want a template. If you want not a template but like an example of a website that I think is really good, go to mastercutslawn.com so let's give her some free traffic. Try to drive her up in the SEO. But it seems like she's doing a pretty good job of that. We got just a clean site. Something I like. I'd say 1 out of 10 landscaping websites I like and so this is one of them. I like the simplicity, I like its mobile friendliness. Pretty good as far as speed is concerned and overall pretty good. Obviously every single one of our websites can improve and there's always little things we can improve on. But you know, I definitely know my landscaping company's website is not designed the best, but I know it's in incredibly fast and SEO friendly as far as what we've been doing with backlinks and everything like that, with the blog and video and things like that. So for now I'm kind of knowing that I have a design flaw, but also knowing that I'm willing to give up a little bit of that in having a really fast website that Google likes to put at the top of its rankings. But yeah, we're working on that probably in the next coming year as far as our website for design. But I did want to say mastercutslawn.com good website if you're looking for an example of one that I think is good. So let me go ahead and read this question. It's from Cass at mastercuts Law Management in Oxford, Mississippi. Here it goes. She says, Mike, we have completed the first module and are through a video or two of the second one. We have a situation we would like your opinion on as soon as possible. We are in month 18 of our business but completing our first full year of operations. I am happy with our year. We have seen nice steady growth. We are at around 35 to $40,000 per month in revenue. Basically all of our profit is going back into the business. We are looking at an $80,000 profit this year. On paper, our accountant has suggested purchasing some Equipment to offset the gain and we can depreciate it this year which will reduce our tax liability. We're looking at purchasing a. Purchasing a skid steer. The only the one we are looking at is a mid sized caterpillar with a bucket on it. It would cost us about $1150 per month for five years. We believe we can make more. Sorry, we believe we can more than cover the payments with new work that we could get with the equipment. I'm sure you have a video on this about this when purchasing this type of equipment, but you are in a bit of a time crunch with the end of the year approaching, what would you suggest? So there is a video in the course Cas that is I believe in module number six about loaders and heavier equipment buying those and things like that. However, this is an important question as far as taxes. So in that video I talk about what kind of equipment, those heavy pieces of equipment you want to be using, like a track loader, skid steer, things like that. Now, when it comes to taxes, my general belief is that you should never. Well, let's say not say never. You should generally. That's a better way of putting it. My real opinion of it is generally you should not spend money just to evade taxes. So if you're purely looking at it from a tax evasion stand, not evasion, but like you're trying to get around your tax liability, trying to hedge your. I don't know how to say it, you decrease your tax liability. There it is. If that's purely your focus, I would not go out and spend a whole bunch of money or add $1,150 a month payment alone essentially to your company. That $1,150 at the moment represents 3 to 4% of your existing revenue. So 3 to 4% of total revenue is pretty substantial. Because if you're running a 20% profit business, which is amazing, you take 4% out of that. Now it's 20% of your profit. If you look at that from. So 4% of your total revenue, 20% is profit. 4% is 20% of 20%. That makes any sense whatsoever. So 20% of your total revenue is, you know, profit. Okay, now we're going to take 4% of total revenue, which is approximately, you know, 1,000 bucks. Put that towards a payment of some heavy piece of equipment, you're looking at 20% of profit. Because 4% is 20%.

Of 20% of your total revenue. That makes for some people that's gonna make no sense. But I think to cast this will make a lot of sense. So essentially you're taking 20% of your profit to go get out this, get this piece of machinery. Now this is the thing that people don't take into account. Number one is the maintenance cost and upkeep cost, storage cost of that piece of equipment. Number two, they don't look at the type of machinery they're gonna need to facilitate the job that that piece of equipment will be used on. What I mean by that is we'll jump into it more. But if you have a track loader, if you have a skid steer, you're gonna be doing bigger jobs all of a sudden you also need a bigger truck to haul that thing. You need a bigger trailer to haul that thing. You need a dump truck to haul that thing. The debris that you start digging up at these kinds of jobs, you need to have an excavator all of a sudden to build walls and to do other things. So that's something people don't think about. Storing that thing like storing the skid steer, all of a sudden you need a shop or a garage or it's taking a bunch of space in your existing facility. Do you have the space to do that? Do you need to grow, expand, build another shop? Those are costs people don't sometimes think about. Cost of insuring that piece of equipment. There's so many other costs. It's not just 1150 as far as cost per month. So when you're looking at how much revenue is going to be brought in additional, you want to really make sure you're going to be using it. Not so much as far as covering the monthly expenses, as much as hourly. Like how many hours are you going to use that piece of equipment every month? Can you go out and pre sell any of that work before you, you go buy it. Can you rent that piece of equipment, which you can by the way, write off as an expense, can you rent that piece of equipment until you desperately need it, and you will be using it many hours each week? So I think from that standpoint, that's one way to look at it, right? Like I think $1150 a month machine, on paper it looks like 1150. I think in practice it's gonna cost you more on 2000. But by the time you take into account insurance, cost of transportation, like more equipment for that, getting the jobs you might have to market for those jobs now hiring people that can actually drive that piece of equipment, you're gonna have to pay them more. They have to train them more. So there's so much more cost than just 1150. Let me just put that out first. Let me hedge all of that by saying this year alone we bought. Wait, let me think. So within the past 16 months we bought two skid steers and a track loader. In the past five months we've bought one of those track loaders and one of the skid steers. So like we buy these, this sort of piece of equipment quite a bit because we have the retail side and we are getting more involved in grading and things like that. So let me just. I wanted to say that but, but to say that just so that you don't. Not scared where like, oh, he's against buying this piece of equipment. I am not. I see the value there. Now let me jump. I know I'm jumping around like crazy here, but I'm just trying to give different angles on this topic and that is this whole tax part. So everything I said from right now backwards is general. Like just looking at a piece of equipment, can you afford it? What's it worth to your business? What's the actual cost? When you're start talking about opportunity cost, where could the money be spent otherwise? I really do believe it's not 1150. I believe it's a lot more. However, like I said, I hedge all that by saying we bought recently, in the past four months, two large pieces of equipment, one brand new, one used, only had a thousand hours on the track loader, which is not. It's basically just getting broken in. So.

We buy it. So let me. I just wanted to throw number two in there to hedge all of what I said. Now number three throws a monkey wrench into everything and that is taxes. And this is the thing that your accountant's trying to. To not trying to. He is suggesting that you do is use the tax code to essentially create a write off. I would like I said before, I personally don't think it's the right thing to do most of the time to spend money to save 30% on your taxes. I don't feel there's the benefit. I'd only use that if you needed the equipment. Okay. So that's general advice. And I'm not an accountant. Obviously your account is the person you'd be talking to. Every single state is different. However, the thing you got to remember, that piece of equipment is going to be wrote off. Written off. However you want to say that it's going to be depreciated. That's the real word, depreciated. Over the course of five years. Or you can take, depending on your accountant and your tax, like talk to your accountant. That's my disclaimer. But you can also write that all off all in one year. But if you do that, you can't use that depreciation later on. So why am I saying that? You gotta look at your tax liability. So if you have $80,000 in net profit, bottom line expense that you're gonna be taxed on, let's say your tax bracket is 30%, so you're looking around like 20 grand. Let's just for round numbers, you're gonna be paying like 20 grand in taxes next year depending on your, if you're an LLC like I know you are cast. But depending if your LLC s corp, like all that garbage aside, let's just assume 20 grand that you are going to be paying to the government. Now if you take a piece of equipment that is worth 40, let's say $50,000 for a track loader or whatever piece of equipment, you're getting $50,000, you gotta, if you're gonna either a, you're going to.

Expense that over five years or you're going to write all of it at once. Let's assume based upon your accountant and your accountants many times will not force you to, but they will suggest that you take the five year amortization, depreciation, whatever you call it, and write that piece of equipment off over five years. There's reasons why they want you to do that. And I get it. Okay, let's assume that you do that. So that $50,000 machine you are going to write off your, you're going to take it off of, you're going to use it as a write off for your taxes over the course of five years. Essentially it's going to take $10,000 off each year off of your net profit margin. Okay? So $80,000 is what you made this year. If you buy this piece of equipment and it's worth $50,000 and you write it off over the course of the next five years, you're going to save yourself. You're going to essentially mark an expense or It's a depreciation. $10,000 off of your, this year's net profit margin, okay, or net profit. So that 80,000 that you're gonna get taxed on and you're gonna get 20 grand knocked off of that. Now all of a sudden you're gonna get taxed on 70,000 instead of the 80,000. Okay? So some people are like, well, I'm saving massive amounts of money this year because I gotta buy a whole bunch of equipment at the end of the year. This is what it comes down to. And that $20,000 that you were going to pay for taxes on the 80,000, now you're paying taxes on the 70,000. But instead of $20,000 in taxes, now you're only paying about 17,500. So you're going to save about 2,000 to $3,000 this year on taxes. So you have to ask yourself the question, is this a long term play, is it a short term play with this piece of equipment? Because it's not necessarily going to bail you out. Buying this one piece of equipment isn't going to make next spring incredibly easy. Keep in mind to use that piece of equipment you might also have to go out and buy a truck and a bigger trailer and a more experienced employee. And so to say that, oh, I'm going to go out and do a write off because basically I'm getting a third of it paid for by the government since I'm getting a write off and that's inaccurate. I think that rich's wealth is built on post tax income. You can't build a whole bunch of, you know, I'll just say that that's all. I'll leave it at that. I believe that wealth is built on post tax income. People try to evade it. People try to get around taxes as personally I feel it's the one way I can give back to my country. I didn't ever spend time in the military and obviously you can say, well you make, you create jobs or blah blah, blah, yes, but I feel the one way I can contribute back to my country is financially. It's one thing I can do as a business owner and so I don't have a big problem with taxes. However, I know people don't want to pay them and I just believe, I generally believe post tax income is where wealth is made. Because when you go out and start trying to get, you know, a line of credit or you try to get better terms on your loan of your house, whatever it is, they're gonna be looking at post tax income. They're gonna be like, what will you tack? What's adjusted, adjusted gross income that you had in your tax return and if that number is not high, they basically look at you as someone that's poor. So that's just my philosophy. Now let's go back to the equipment equation or question. It is an equation of a part of it, but you also have to look at the growth of your business, where the money's at, your market, and can you truly make a lot of money having that piece of equipment cast? Now, let me direct this to you. I would be looking at having a conversation about how much money you're gonna actually pull in from this piece of equipment, number one. And number two, are you gonna have to buy another truck, a bigger trailer, a bigger facility, more experienced employees? If not, because you might already have a good employee that can do it. You might be able to do it yourself. You might already have the facility to store it. You might already have the truck, and the trailer can already handle a 10,000 pound piece of equipment.

Your insurance might already be covering landscaping to that degree. You might already be renting pieces of equipment, so you're already covered. Your employees are well trained in that, in using that piece of equipment. So the question is, can you sell enough next year? Do you genuinely believe you can make an extra 5, 6, 7 plus thousand dollars in gross revenue next year because of this piece of equipment? Because I generally believe you got to make an extra five to eight grand per month to make it worth it. As far as gross revenue, I don't mean net, I mean gross. Can you grab one more landscaping job that is a 5, $10,000 job each month? You know, I think it's totally possible. Obviously, I think it's, there's, there's positives to buying these pieces of equipment. I bought three of them in the past 16 months and probably will get more. But it's got to make, it's gotta make sense from a number standpoint. The accountant will always want to try to help you like they're trying to help you. Let me just make it clear, like accountants are trying to help you when they're trying to find ways that you can reduce your tax liability. And, you know, buying equipment and having write offs is one way to do it. And this end of year, the reason I'm talking about this is December, right? End of year, everyone's like, oh, I gotta go buy a whole bunch of equipment. This is the question, okay, you're gonna buy it with cash, because if you do, can that cash be used for marketing in next spring? Or are you gonna become strapped because you buy this piece of equipment with your cash? Are you gonna become strapped cash wise and not be able to expand in the marketplace, hire new people and, and do marketing next spring, which would drastically increase your profitability and your scalability next year? A whole lot more than one piece of equipment. Don't put your eggs all in one basket. Because what if some other landscaping company moves into your area with the same piece of equipment or, you know, comparable, and they're able to do all the work for half the price that you do? So don't put all your eggs in one basket. Oh, I'm going to get this massive piece of equipment. I would ask yourself, as I always do with all my business decisions, protect the downside. Yes, we're entrepreneurs. Yes, we take risks. Yes, we're small business owners. Yes, there's lots of risks involved with that. However, always protect your downside. What happens, Cass, if you don't get any landscaping jobs? Can you still pay the payment? Obviously you can. You had 80,000 on paper last year. But is it going to hurt the other areas of business that are already growing? You're 18 months in and making 30 to 40k. So is next year going to be able to go to 50, 60 without that piece of equipment? But if something goes wrong with that piece of equipment, if it breaks, if there's a big expense, if there's a maintenance cost, if you don't get any landscaping jobs. Now, that 1150 could have been put towards marketing. Could that 1150 in marketing generate massively more amount of business than five to six thousand dollars that that piece of equipment does each month? So that's like all of that people are. Most people, after I say all of that is gonna be like, man, I should buy a piece of big piece of equipment. I should be, you know, I should just put it all into marketing. Or I should not be getting these skid steers and track loaders and dump trucks and bigger trucks and trailers. Okay, all right, all right. I'm glad you got that out of the last few minutes. But let me say this. I have bought dump trucks and dump trailers, like ones that can handle £14,000. We've bought track loaders and skid steers. Like, we've bought tree chippers. Like, we got all the equipment. Okay? So I mean, hedge that all. And the reason is. But the reason is we've made it make sense from a money standpoint, from a numbers standpoint. And the reason I say all that negative kind of about it, or like not negative, but the other flips, you know, the flip side of the coin from what your accountant's saying. The reason I say all of that is because I find the majority of landscape business owners jump into this December thing with a bunch. We have a bunch of cash right now. November was good. You know, the summer was good. People are paying up now. You know, now you're not having many. You know, your employees aren't working as many hours, but yet your payables are still coming in. Sorry, your receivables are still coming in because, you know, just overflow from the fall. And like, money is good, there's cash, and then all of a sudden you're like, man, I'm gonna be hit with this tax bill next year and I might as well, you know, pay, buy a piece of equipment, because the government's gonna pay for a third of it. Just be careful. I think too many people fall way too far on that side, and that's why I'm trying to bring out the balance. But that being said, the pieces of equipment can pay for themselves. Make sure, number one, that the cost that they incur on the business are feasible and that there's not the hidden cost that you aren't taking into account, like storage, more equipment that has to support it, more employees trained that support that piece of equipment, et cetera, et cetera, insurance, all those things. And that, number two.

That, that. That money that is spent on that has an opportunity cost of spending that money elsewhere. So, like I said, I'm not telling you not to buy these things. I genuinely believe there's a good reason to buy these things. In the past month, we bought a dump truck, a dump trailer, a track loader, a tree chipper, and probably other stuff. Basically because we are trying to do exactly what you're doing, Cas, exactly what many landscape business owners are doing, and that is trying to reduce your tax liability at the end of the year. We have the cash, we have the. But the reason I'm bringing this so far on the other end is because I see so many people go so far on that end that they lose their cash position coming into next spring. They forget that January and February are long. There's not much work, or it's long, less work, there's not as much margin in that work or discounted labor. So, like, you gotta figure this stuff out, work the numbers out, and see if it works for you.

I could do an entire podcast on the exact opposite angle of what I just talked about in this episode. I could talk about, make it sound incredibly appealing to buy a heavy piece of equipment and make the money and pay for it, and then you have an asset at the end of it. Like, I could make a completely different argument. But the reason I'm going so far on this other end is to be kind of the devil advocate, because your accountant will tell you the benefits so I'm telling you the pros, the cons. He'll tell you the pros. You have to make an educated decision as to if that is the best decision for your business. And one of the best ways to think about this. I always think about this. Could that monthly amount, if you paid $1050 every single month for the next five years or three years or whatever it is your term, would your business triple in size just based upon that? And will that piece of equipment do the same thing for you? Think about that. And if you can still answer yes, then buy the piece of equipment. So that's my $0.02. Cas, I know that is not comprehensive advice. I know I'll get several emails and some people will show up in the webinar. Not happy about what I'm talking about right now, but I know I'm kind of over on one side trying to bring a balance to the general landscape industry, kind of where everything's at in the minds of most landscape business owners. So I hope that makes sense. Cas. I hope that makes sense for everyone out there that's thinking about these same things and has been for the past several weeks and months as we end 2017. So if there's lots of questions on this via email, I'm happy to dig in this into the Q and A not during the meat of the webinar, but during Q and A. If you have questions about this stuff, like numbers, throw them at me. If you had questions about my percentages and things like that, bring them to the webinar again. 44222 is the number you need to text. Just text one word. Landscape business. No space. It'll sign you up for the webinar. I can't wait to see you. It's just two more days away and tomorrow I'm going to be sending everybody that PDF workbook and I can't wait to see you. So definitely sign up for that and I can't wait to see you there. Landscapebusinesscourse.com this is Mike Andes signing off until Thursday on the webinar. Be great because nothing else pays.