Take advantage of available tax incentives created by the government to encourage businesses to buy equipment and invest in themselves.
If you're looking to put money back to your bottom line this year, your business could save thousands of dollars on new and used equipment purchases in the United States. Take advantage of available tax incentives created by the government to encourage businesses to buy equipment and invest in themselves. There are similar tax advantage opportunities in Canada as well.
Let's start with the U.S. Section 179 of the IRS Tax Code, which offers eligible businesses a great opportunity to maximize purchasing power. Most of the new and used (must be new to you) equipment your business will purchase or finance will qualify for the Section 179 deduction. Section 179 allows you to deduct the FULL PURCHASE PRICE of qualifying equipment in the year it was put into service. This creates a larger initial expense deduction than using a standard depreciation method, thus reducing the tax burden for the company. Keep in mind, Section 179 cannot result in a net loss.
Section 179 Highlights for 2019 Include:
- Maximum amount that can be deducted is $1 million.
- Maximum amount of equipment purchased (and take the full deduction) is $2.5 million.
Section 168(k) allows for bonus depreciation (currently 100 percent expensing) on eligible equipment and property, thus allowing accelerated depreciation for a reduced tax burden, similar to the Section 179 deduction. A company can take both Section 179 and bonus depreciation allowances, but Section 179 must be applied first. Therefore, any qualified property purchased over the $1 million limit may then be taken in bonus depreciation. So it's great for businesses that spend more than the Section 179 spending limit. Bonus depreciation is scheduled to phase out over the next 7 years (see table below).
Placed in Service Date — Bonus Depreciation
Sept. 28, 2017, to Dec. 31, 2022 — 100 percent
Jan. 1, 2023, to Dec. 31, 2023 — 80 percent
Jan. 1, 2024, to Dec. 31, 2024 — 60 percent
Jan. 1, 2025, to Dec. 31, 2025 — 40 percent
Jan. 1, 2026, to Dec. 31, 2026 — 20 percent
Jan. 1, 2027, and thereafter — 0 percent
Section 168(k) Bonus Depreciation Highlights for 2019 Include:
- Bonus depreciation has been increased to 100 percent (up from 50 percent) of the cost of both new equipment and used equipment (must be new to you) obtained through an unrelated third party between Sept. 27, 2017, and Jan. 1, 2023.
Bonus depreciation is ideal for larger businesses who spend more than the $2.5 million purchase cap noted above.
- It's also important to note that equipment must be used for business purposes more than 50 percent of the time to qualify for these deductions.
- Businesses with a net loss are still qualified to deduct the cost of new equipment and carry-forward the loss.
Let's look at the tax savings introduced by bonus depreciation, along with Section 179.
New/Used Equipment — Tax Year 2019
Equipment Purchases — $1,500,000
Section 179 Deduction — $1,000,000
Depreciable Amount — $500,000
Bonus Depreciation (100 percent of Depreciable Amount) — $500,000
Regular Depreciation — 0
Total First-Year Deduction — $1,500,000
Tax Rate — 21 percent
Total First-Year Tax Savings (Section 179 and Bonus Depreciation) — $315,000
Tax Savings using Section 179 Only — $1,000,000 x .21 = $210,000
Before you take Section 179 and/or bonus depreciation deductions, consult with your tax or legal advisor.
In Canada, the Department of Finance has updated the Capital Cost Allowance to allow businesses to immediately expense 100 percent of the cost of certain new machines that are purchased after Nov. 20, 2018, and before 2028 — so this applies to all of 2019. Under new Accelerated Investment Incentive rules, Canadian businesses also are eligible for an enhanced tax depreciation write-off in 2019 of up to three times the amount that would normally apply. For example, if a business purchased equipment for $100,000 and utilized the machine that year, it would be eligible for a first-year write off of $10,000 (10 percent of the capital cost of the equipment). Under the new rules, the business can now claim tax depreciation in the first year of $30,000 (three times the original amount).
If you have additional questions about the advantages of Section 179 and bonus depreciation, check out these FAQs or talk to your local tax advisor.
Disclaimer: U.S. and Canadian tax incentives are complicated. There are many limits, exclusions and special rules for different types of businesses in each country. The information in this article, and on this site, is not and should not be construed as tax or legal advice. Each business situation is different and tax regulations change frequently. We strongly recommend that you consult with your tax advisor regarding how these tax-saving opportunities apply in your situation.
Agako Nouch is vice president, sales, at Volvo Construction Equipment. Ryan Sherwood is vice president, retail development, at Volvo Construction Equipment.
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