Tax Strategies & Credits

Best Ways for Small Businesses to Write Off Equipment Purchases

by
Julie Farless
on
11/19/2017
Best Ways for Small Businesses to Write Off Equipment Purchases

Best Ways For Small Businesses To Write Off Equipment Purchases

Every time a small business owner makes a purchase that contributes to the operations of their organization, they have to make a decision about how they should handle the expense. Whether they're buying new computers or cubicles, a fleet of vehicles or office supplies, there are numerous ways to take their deductions, and each time they have to figure out which method will serve them best. Much of that determination is based on whether the write off will serve them best as a single deduction for the present tax year or over an extended period of years in the form of annual depreciation. The more you understand how the system works, the better you will be able to make the right decision.

Here are all of your options:

Depreciation

When you're making a capital purchase for your business, you can spread the expense's tax benefit over a period of years. This process is known as depreciation, and different types of purchases have different categories that define the period of time over which they can be spread. In most cases the Internal Revenue Service has created asset categories that allow for periods of three, five and seven years, with expenses including copiers and computers, cars and trucks generally falling into the five-year-write-off category and office fixtures, equipment and furniture falling into the seven-year-write-off category. 

There are also other types of expenses that have their own specific method of depreciation. These include:

  • Bonus Depreciation - Bonus depreciation provides a combined benefit of allowing a significant write-off of 50% of the cost for the year the new property is placed in service, with the rest of the expense spaced out and depreciated over the rest of its depreciable life. This form of depreciation is phasing out over the next few years: it was established as a temporary provision, so the first year bonus of 50% that is in place for the tax year 2017 will drop by 10% to 40 for the tax year 2018. It will drop another 10% in 2019 to just 30%, and after that, it will disappear entirely.
  • De Minimis Safe Harbor Expensing - There is a certain amount of flexibility as to how a one-time equipment purchase can be written off, with businesses allowed to opt for either writing off up to $25,00 per single item or per invoice. Additionally, the IRS allows small businesses that have applicable financial statements to increase that limit to $5,000.
  • Expensing - When a small business purchases tangible equipment, they are also eligible to take advantage of a tax provision known as Sec. 179 expensing. Named for the tax code section in which it is contained, this allows businesses to expense a percentage of their cost during the first year that the equipment is put into business service, depending upon that year's allowance. For 2017 the amount is $520,000, and the amount is adjusted each year for inflation. There are, however, limitations to the use of this provision, as it is specifically intended for small business investment: any time that a business's total property purchases exceed that year's limit, the expensing allowance is cut by the same amount that it exceeds. For 2017, the limit is $2,030,000. It is important to note that when a business applies the Sec. 179 provision but elects to get rid of the item for which it was used before its normal depreciable life, any amount between the deduction that was taken and what would have been depreciated will be recaptured by the government for the tax year that it was eliminated. 
  • Material & Supply Expensing - When purchases are made for items that cost $200 or less, or that are not expected to last more than one year, the business is permitted to write them off fully in the year of purchase.
  • Mixing Methods - It is possible to combine different types of expenses, such as bonus depreciation and Sec. 179, on a single item. Careful use of mixing methods can result in an asset being completely written off in the year of its purchase.
  • Routine Maintenance - In addition to deductions for purchases, there are also allowed write-offs for maintenance that needs to be done in order to keep an asset operating. The IRS permits two of these write-offs during an asset's class life, which follows a different schedule from depreciation. The chart of class life and depreciable life is provided here for reference.

Beyond these classifications, there are other considerations that must be kept in mind including the alternative minimum tax (AMT). Specific expenses are considered preference items that could result in AMT tax being either triggered or increased. These preference items include the difference between 200% MACRS depreciation, as well as 150% MACRS depreciation. However, Sec. 179 expensing and bonus depreciation are not preference items and will not have this effect.

It is also important to note that there is a tax reform proposal currently in the works which could impact many of the depreciation rules, including potentially providing unlimited expensing of tangible equipment for a minimum of 5 years. We will provide updates on the proposal and its impact if it becomes law.

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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