It is tricky to write off equipment purchases. In this article we we discuss the following: Depreciation, Materials & Supplies, De Minimis Safe, Harbor Expensing, Routine Maintenance, Unlimited Expensing, Bonus Depreciation, Sec 179 Expensing and Mixing Methods. Phew! That was a mouthful!
Small Business Purchases
Small business owners will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. The small business owner has to consider how to write off equipment purchases. Deducting the cost for tax purposes is not always an easy decision because there are a many of options available. The decision will depend upon whether a big deduction is necessary. For example, necessary for the acquisition year or obtaining more benefit can by deducting the expense over a number of years using depreciation. The following are the write-off options currently available.
Depreciation
Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations is specific about basing the write-off by the number of years for the on asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment.
Material & Supply Expensing
IRS regulations allow materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed. This means business owners can take the deduction all at once in one year, rather than depreciate that expense.
De Minimis Safe Harbor Expensing
Another option to consider when you write off equipment purchases is De Minimis Sae Harboring Expensing. IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. For businesses that have an applicable financial statement, generally large businesses, the $5,000, up from the $2,500 threshhold.
Routine Maintenance
IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition. Meaning, where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life when you write off equipment purchases.
| Depreciable Item |
Class Life |
Depreciable Life |
| Office Furnishings | 10 | 7 |
| Information Systems | 6 | 5 |
| Computers | 6 | 5 |
| Autos & Taxis | 3 | 5 |
| Light Trucks | 4 | 5 |
| Heavy Trucks | 6 | 5 |
Unlimited Expensing
The Tax Cuts and Jobs Act passed in December 2017 includes a provision allowing 100% unlimited expensing of tangible business assets (except structures). The business assets aquisition must be after September 27, 2017 and through 2022. The Act applies when a taxpayer first uses the asset, and the asset can be new or used property.
Bonus Depreciation
The tax code provides for a first-year bonus depreciation that allows a business to deduct 50% of the cost of most new tangible property. The equipment must have been in service during 2017. The remaining cost deduction is over the asset’s depreciable life. The 50% rate applies for new property that is in service prior to September 28, 2017. Also, by owner’s choice, new or used property acquired and first put into use by the taxpayer after September 27, 2017 and before December 31, 2017 is also part of the 50% rate.
Sec 179 Expensing
Another option the IRS tax code gives is an expensing provision for small businesses. The IRS allows the business a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first put into the service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $510,000 for 2017 and $1 million for 2018. To ensure that this provision is specific to small businesses, whenever a business purchases property eligible for Sec 179 treatment, that exceeds the year’s investment limit, the annual expensing allowance reduces by one dollar for each dollar the investment limit is goes over. The investment limits for Sec 179 are $2,030,000 for 2017 and $2.5 million for 2018.
Section 179 Disadvantage
An undesirable consequence of using Sec. 179 expensing occurs when the business gets rid of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.
Mixing Methods
Specific items can use a mixture of Sec. 179 expensing, bonus depreciation and regular depreciation. These methods allow just about any amount of write-off for the year for that asset.For some individual taxpayers the alternative minimum tax (AMT) may be a concern. Bonus depreciation and Sec. 179 expensing are not preference items, and therefore their use will not trigger an AMT add-on tax. However, the AMT tax could result when a claim is made and the difference between 200% MACRS depreciation and the 150% MACRS depreciation is a preference item for AMT.
Write Off Equipment Purchases and Questions
Expensing under the new tax law will take a learning curve. Why not call a tax expert who can help you take all the guessing out of the equation? Taking advantage of tax reform can save you a lot of money if you have the right strategy in place. If you would like to make an appointment to develop a year-end tax strategy, give Alex Franch, BS EA a call at 781.849.7200 or email us at contactus@worthtax.com.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.
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