Years ago when an organization purchased large equipment, the cost was most likely written off over the course of time through a standard depreciation schedule. As the years went by the business would write off 100% of the acquisition cost of the equipment. During the 2008 recession, the U.S. government was looking for ways to stimulate the economy and encouraged businesses to invest in themselves. This is where Section 179 of the tax code that existed for years, made major changes.
In 2008 another change came with the tax code, the addition of "bonus first year depreciation" for qualifying purchases. In the past this was utilized after the Section 179 deduction limit was reached, and historically only applied for new equipment.
Today, if you own or operate a business in the construction or access industries, you're familiar with Section 179 and bonus depreciation. Both tax incentives were created as a goal for small and mid-size companies to purchase high-ticket items and write off the entire acquisition cost in the first year of use. These types of equipment include scissor lifts, telehandlers, boom lifts, and even updated business software. Bottom line, Section 179 plus potential bonus depreciation can increase purchasing power of your small or mid-size business by eliminating the need to wait several years to take advantage of these tax savings (tax breaks).
What’s Changed Since Then?
In January 2018, with the psasing of the Tax Cuts and Jobs Act (TCJA), there have been some major changes to the limits and type of equipment that qualify for bonus depreciation were introduced. There are 2 major changes you need to be aware of:
1. 100% Bonus Depreciation
In 2018 bonus depreciation increased to 100% and will remain that level for 5 years. After 5 years it will phase out over the coming years (TBD)
2. New vs Used Equipment
The most important difference for tax payers and organizations who purchase aerial equipment is that in 2018, both new and used equipment qualify for bonus depreciation as long as the used equipment is 'new to you'). Leased equipment is eligible as well!
The chart below illustrates the tax savings potential when combining Section 179 and bonus depreciation.
If you are deciding whether to purchase equipment by the end of the year, you most likely have several questions when it comes to Section 179 and bonus depreciation.
Few Common Section 179 and Bonus Depreciation Questions
1. What equipment qualifies for the Section 179 deduction?
Here are some examples of equipment that may qualify for Section 179:
- Equipment (machines like scissor lifts, boom lifts, etc.) purchased for business use
- Tangible personal property used in business
- Business Vehicles with a gross vehicle weight in excess of 6,000 lbs (see Section 179 Vehicle Deductions)
- Computers
- Computer “Off-the-Shelf” Software
- Office Furniture
- Office Equipment
2. Does only new equipment qualify for the deduction?
No, used equipment also qualifies for the Section 179 deduction so long as it is “new to you”.
3. Is there a spending limit for the Section 179 deduction?
There are limits to Section 179 with caps to the total amount written off ($1,080,000 for 2022). And there are limits to the total amount of the equipment purchased ($2,700,000 in 2022). After $2,700,000 the deduction beings to phase out on a dollar-for dollar basis, so this makes Section 179 perfectly suited for small and mid-size companies.
4. What is bonus depreciation?
To begin, bonus depreciation is not offered each year. Since the 2018 changes, it's been offered at 100%. The biggest difference is both new and used equipment qualify for the Section 179 deduction (remember, as long as the used equipment is "new to you"). Whereas Bonus Depreciation has only covered new equipment until the most recent tax law was passed in a switch from recent years, bonus depreciation now includes used equipment.
5. When is the deadline to apply for Section 179 and potential bonus depreciation?
In order to apply the deduction for the 2022 tax year, equipment must be financed, leased or purchased between January 1, 2022 and December 31, 2022. The eligible equipment must also be put in to service (delivered to your organization and ready to work) before midnight on December 31, 2022 in order for eligibility.
Remember: prior equipment purchases made throughout the year may already have used the deduction to its full potential.
There’s a lot to consider to determine if your business would benefit from a Section 179 and/or a bonus depreciation deduction. Before making a final decision, be sure to check with a local accountant or tax consultant to determine if it’s in your best interest to utilize either incentive.
Resources:
New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act
The information on this page should not be construed as tax advice or as a promise of potential tax savings or reduced tax liability. Please contact your accountant or tax consultant/attorney to see how Section 179 and bonus depreciation would apply to your individual business.
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