Business Depreciation (What Is It and How Can It Improve Cash Flow?)
Did you know that you can take a tax deduction for 100% of your equipment’s cost in the year you buy it using bonus depreciation and/or the Section 179 deduction?
Bonus depreciation and Section 179 deduction are especially beneficial to companies that need to purchase significant amounts of equipment to operate their business. By accelerating deductions, companies are able to take advantage of the time value of money by essentially “deferring” income taxes to future years.
Bonus depreciation and the Section 179 deduction are the U.S. government’s way of encouraging small businesses to purchase equipment by providing tax incentives while also stimulating the economy. Equipment gets sold and used, and profits get made: It’s a win-win.
What is the Bonus Depreciation Deduction?
Businesses can deduct 100% of the cost of certain assets in the first year they are placed in service. Bonus depreciation can be taken on all qualifying new and used assets placed in service between September 28, 2017, and December 31, 2022. Under current regulations, starting in 2023, the percentage of allowable bonus depreciation will be reduced by 20% per year.
Most types of business property, except for real estate, qualify for this deduction; however, special rules are in place for certain assets such as passenger vehicles used for business. Examples of qualifying equipment include:
Business equipment, such as:
Septic Pumper Trucks
Screen Printing Equipment
Computers and other office equipment
Key Points for the Bonus Deduction:
There is no annual limit, no matter how much equipment you purchase each year.
You can take the deduction even if it creates a loss for tax purposes.
For any year that you elect bonus depreciation, you must take the deduction for the full cost of all assets of the same tax asset class acquired that year, for example all 5-year assets; but since the election is made annually, taking the deduction in one year does not affect your ability to elect, or not-elect, it in the next year.
What is the Section 179 Deduction?
A business can elect to expense the cost of any new and used Section 179 property (most tangible goods used by businesses, including “off-the-shelf” software and business-use passenger vehicles qualify) and deduct it in the year the property is placed in service. However, the asset must be used more than 50% for business.
The maximum Section 179 deduction for 2020
The maximum Section 179 deduction for 2020 is $1.04 million, and the limit increases slightly each year for inflation.
The Section 179 deduction is phased out for businesses that have a large number of property additions during a tax year. The deduction begins to phase out once your qualified asset purchases for the year exceeds $2.59 million for 2020, and this limit is also adjusted annually for inflation.
Use of the Section 179 deduction is limited to the amount of a business' taxable income, therefore it cannot create or increase a tax loss. If that occurs, the section 179 deduction will be carried forward to future years where there is taxable income to offset it.
Key Points for the Section 179 Deduction:
There is an annual limit.
The deduction cannot create a loss for tax purposes. If it does, the deduction will be limited to taxable income and the remainder carried forward against future taxable income.
You may take the deduction for a portion of the cost of an asset and have flexibility over which assets to use the deduction on.
Bonus and Section 179 depreciation both allow businesses to deduct some or all of the cost of eligible purchases the year they acquire them rather than using conventional depreciation to spread the deduction out over multiple years.
Cash flow is improved by allowing the tax savings to be used to “finance” a portion of the cost of the assets purchased.
Where Do I Start? (From Financing to Equipment Ownership)
The road to equipment ownership isn't always easy, but regulations like Bonus and Section 179 depreciation are available to soften the financial burden of new asset purchases. And fortunately, the deductions are available to businesses for all equipment purchases, even if the equipment is financed!
Our goal: To see you and your business succeed. If you need help purchasing equipment to achieve your business dreams, contact us. We have over 30 years invested in helping businesses finance their equipment.
Remember, the sooner you plan ahead for equipment financing, the better chance of not only guaranteeing the equipment is available for purchase, but seeing the benefits of tax savings before the year ends!
About the Author - ECS Financial Services' shareholder, Tobey Wilson, is a Certified Public Accountant (CPA) and Certified Lease and Finance Profession (CLFP). He joined ECS Financial Services in 2002 as an accounting intern, after receiving his bachelor's degree from Indiana University.
Tobey became an ECS shareholder in January 2015. Tobey's expertise includes financial statement compilations, reviews and audits, ERISA audits, financial projections, business and personal tax preparation, and management consulting, as well as personal and corporate tax planning.
Tobey likes working at ECS because he enjoys the people and feels they are like family. Tobey is active in his church and his son’s cub scouts, where he holds the position of Treasurer, and he enjoys spending his free time with his family traveling and visiting presidential museums and homes. Their goal is to visit every state!