Growing Your Business

How Small Businesses Write Off Equipment Purchases

by
Julie Farless
on
1/30/2018
How Small Businesses Write Off Equipment Purchases

No matter how small or home-grown a business may be, there are still purchases that need to be made to keep the business running. Companies need computers and office furnishings, equipment, and even vehicles. These expenditures are generally deductible, and the tax code provides a number of different ways that these write-offs can be taken. Most of the decisions about which option to choose are left up to the business owner, who can examine their business needs to determine which will offer them the greatest benefit. In some cases, a single deduction taken in the year that an expense is made can be more advantageous than splitting the deductions up over the years that the acquisition depreciates.

If you are a small business owner, the information provided below will help you to understand your options.

Depreciation

When you want to be able to write off the expense of an equipment purchase over a period of time, your best option is the one that’s most commonly used: depreciation. The number of years over which the deduction can be taken depends on what the expense was for, as the Internal Revenue Code includes several asset categories for the most common small business purchases. The longest period is 7 years, which is reserved for furniture, equipment, and office fixtures, while cars and small trucks, copiers, computers and specific equipment used for research and technology purposes fall into a 5-year category. The table below shows the depreciable lives for the most common small business purchases. It also shows the “class life,” which is used for an alternate system of depreciation and for other tax matters (see next item, for example).   

Routine Maintenance

In addition to allowing businesses to write off their acquisition expenses, the IRS also permits deductions for keeping those acquisitions running two times during the item’s class life.  

Material & Supply Expensing

Many of the expenses that small businesses incur are for supplies and materials that have a short useful life. For those that cost $200 or less, the IRS allows businesses to forego depreciation, instead of allowing them to fully deduct the costs in the year of the expenditure.

Unlimited Expensing

With the passage of tax reform legislation in December of 2017, the law allows businesses to fully write off 100% of the cost of any tangible business asset other than a structure. This provision applies retroactively to acquisitions made any time after September 27, 2017, and through December 31, 2022, with the deduction being taken in the year that the asset, whether new or used, is first used.

De Minimis Safe Harbor Expensing

This regulation permits a write-off of equipment purchases up to $2,500 (per item or invoice), and for businesses that have an applicable financial statement, that limit doubles to $5,000.

Sec 179 Expensing

Section 179 expensing gets its name from the tax code section under which it was created. It allows an annual inflation-adjusted amount ($510,000 for 2017, increasing to $1 million for 2018) to be expensed in the year that tangible equipment is first placed into service. Though this law was specifically designed to benefit small businesses, many large businesses have tried to make use of it, so the rules specify that when qualified property purchases exceed specified limits ($2,030,000 in 2017 and $2.5 million in 2018), the allowance will be cut by the amount of the excess. It is important to know the depreciable life of the item that has been acquired, as if it is disposed of before that period of time, the difference between the Sec. 179 deduction and the amount that would normally have been depreciated will be calculated and treated as income in the tax year that the item was disposed of.

Bonus Depreciation

For most new tangible property purchased before September 28, 2017, businesses are allowed to take a deduction of 50% of the property’s purchase cost under what is known as bonus depreciation. The balance of the property’s cost is then split into annual deductions over the rest of its depreciable life. Businesses can also elect to do this for either new or used tangible property purchased and put into use between September 28th and December 31st, 2017.

Mixing Methods

The tax code allows businesses to combine bonus depreciation, regular depreciation and Sec. 179 expensing on a particular asset. This gives businesses the freedom to write off almost any amount in the year that the asset is put into service.

Keep in mind that Sec. 179 and bonus depreciation are not what is known as preference items, which means that using them won’t make individual taxpayers vulnerable to the alternative minimum tax (AMT). However, AMT can become an issue if you claim the MACRS depreciation, as the difference between 200% depreciation and 150% depreciation could trigger the add-on tax.

Martinez & Shanken, PLLC writes for TaxBuzz, a tax news and advice website. Reach the firm at [email protected]

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Julie Farless

Julie Farless

Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services, but we specialize in tax preparation. We work with you to ensure that your personal or business processes are conducted in a manner that ensures ongoing integrity in your financial transactions. We are available to answer your questions and help with your ongoing tax planning and changing business needs.

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