With the end of the year approaching, it is a good time to start planning for the next work season by considering your future equipment needs. Do you need to upgrade one of your machines or add to your fleet? If you decide to invest in a new or used machine, consult with a tax professional as your purchase may qualify for tax benefits. These benefits may also influence when you want to finalize your purchase since some tax incentives have purchase date restrictions. To help guide your investment strategy, here are some important tax benefits to keep in mind.
To incentivize small business growth, Section 179 of the U.S. tax code allows businesses to deduct the full purchase price of qualifying equipment bought or financed during the tax year. The deduction decreases your gross income and therefore the amount of money you owe in taxes. However, you must buy (or lease) the equipment within the same tax year that you are claiming the deduction. If you want to claim a Section 179 deduction on your 2023 taxes, you must purchase or finance the equipment by December 31, 2023.
While you can make Section 179 deductions every year, there is a limit to how much you can deduct each tax year. The limit often changes from year to year. For 2023, the deduction limit is $1,160,000. There is also a limit on the amount your company can spend on equipment before the deduction is reduced. For 2023, the spending cap is $2,890,000. After a business spends this amount on qualifying equipment, the Section 179 deduction phases out dollar by dollar. Once the amount a business spends reaches $4,050,000, the business won’t receive a further deduction on equipment.
In addition to the Section 179 deduction, businesses can also benefit from bonus depreciation which allows companies to write off a portion of an equipment investment during the year of purchase. The provision under Section 168(k) currently offers an 80% expensing bonus depreciation on qualifying equipment. This acts as a means of hastening depreciation, thereby reducing the tax liability.
Companies can claim both Section 179 and bonus depreciation in the same tax year, with the stipulation that Section 179 must be utilized first. Consequently, any eligible equipment exceeding the $1,160,000 threshold can only then be subjected to bonus depreciation. While there is no dollar limit on bonus depreciation, it is important to note that the qualifying equipment must be used for business purposes more than 50% of its operational runtime in order to qualify for bonus depreciation.
Prior to 2023, the depreciation rate was 100%, which is worth noting because on top of the reduction to 80% in 2023, the rate of bonus depreciation will continue to decrease in the following years: it will be 60% for 2024, 40% for 2025, 20% for 2026, and will be completely phased out by 2027. So, there’s no better time than now to take advantage of the incentive (unless of course we could turn back time to 2022…).
While Section 179 and bonus deprecation are valuable benefits, they may not be the best choice for every business. Be sure to consult with a tax professional and understand all your options before making a significant business decision. They will help you make the right decision by considering your unique goals and financial status.