You need things to run your business. Kitchen appliances for your restaurant. An excavator for your construction company. Tractors and harvesting equipment for your farms. Software for your financials.
Fortunately, there are some tax laws that encourage businesses to buy equipment – bonus depreciation and Section 179.
In December 2017, the Tax Cuts and Jobs Act (the Act) updated these laws. Now, businesses might see a greater reward for purchasing and using new business equipment.
Take a look at these changes and think about how they might apply to your business. Does your depreciation strategy change? Can you take advantage of these benefits in new ways? Is it a good time to buy more equipment?
Depreciation is how businesses spread out the cost of assets over the life of the asset. You’re a contractor. You buy a new excavator for your business. You’d rather extend the cost of the excavator over 15 years rather than deduct it all at once.
What’s bonus depreciation?
It’s a way for businesses to speed up depreciation and take a greater deduction up front. Businesses can claim a larger deduction for the cost of property in the first year it’s placed in service.
When the asset is placed in service, it marks the start of the depreciation period. Congress created bonus depreciation as an incentive for companies to purchase more assets.
The Act amended the existing depreciation law. It increased the bonus depreciation percentage and widened the scope of eligible property. It also extended the depreciation rules through 2026.
New bonus depreciation rates
The old law capped bonus depreciation at 50% for the first year an asset was placed in service.
Now, businesses can claim 100% bonus depreciation for the property they acquire and place in service between Sept. 27, 2017, and Jan. 1, 2027.
The 100% rate holds until 2022 and begins to phase down in 2023. In 2023, the bonus depreciation rate will be 80%, then 60% in 2024, 40% in 2025, and 20% in 2026.
What property is eligible for bonus depreciation?
Before the Act, there were limitations on which types of property were eligible for bonus depreciation. Only new property qualified.
Qualified property for bonus depreciation also included tangible personal property with a recovery period of 20 years or less, off-the-shelf computer software, and qualified improvement property.
The Act added more types of property to its definition of qualified property.
These assets are now qualified property:
- Tangible personal property with a recovery period of 20 years or less
- Off-the-shelf computer software
- Qualified film, television, and live theatrical productions that are released, broadcast or staged live after Sept. 27, 2017
- Used property
Does used property have any limitations?
Yes. For any used property to qualify for bonus depreciation, the taxpayer can’t use the property before acquiring it. And, the taxpayer can’t acquire it from a related party or a member of a controlled group of corporations.
What’s new with Section 179?
Section 179 is another deduction tool for businesses to save on the cost of equipment and property purchases. While Section 179 seems very similar to bonus depreciation, they’re separate laws with their own limitations and requirements.
For example, you can’t claim Section 179 if you have a taxable loss. It’s limited to your taxable income. You can’t use it to create a loss or deepen an existing loss.
But, you can claim bonus depreciation because it’s not limited to your taxable income. If claiming the deduction creates a net operating loss (NOL), you can follow the new NOL laws.
Under Section 179, businesses can deduct the full purchase price of qualifying equipment and software from their gross income. Simply put, they can write off the entire cost of a purchase in the year they buy it and place it in service.
For 2019, businesses can only deduct $1 million. Phase-outs begin when eligible asset purchases exceed $2.5 million.
This deduction applies to new and used equipment. And, you must place the equipment in service sometime in 2019. In addition, you must use the equipment in your business more than 50% of the time.
Your business has a number of incentives to choose from when deducting the cost of equipment and assets you use in your business. With these incentives comes the opportunity to strategize how you want to depreciate your assets.
This is another way to maximize your savings. Don’t let it pass you by. Work with your accountant to review your assets and find the best way to deduct the cost of your equipment purchases.
Originally published 11/16/18. Updated 8/22/19.
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