Accelerated Depreciation Benefits for 2023 Equipment Purchases For Small to Medium-Sized Businesses
The benefits are made possible by the Tax Cuts and Jobs Act of 2017 relating to IRS Section 179, and to the Bonus Depreciation benefit. For 2023, the maximum deduction and the maximum cost of equipment have been increased. But the extent of deductibility is lessening, with the Bonus Depreciation percentage already down to 80% this year and dropping 20% each year until going away in 2027.
The Section 179 Qualifying Equipment deduction, however, remains at 100%, meaning that a business could take the entire depreciation deduction in the year of purchase and installation of qualified capital equipment – new or used, and acquired via financing, lease, or cash. The first-year expense contrasts with the traditional method of deducting equipment expenses over the course of several years.
Section 179 Qualifying Equipment Benefit Focuses on Small, Medium Size Companies
“The intent of the tax law changes was to help small and medium-sized businesses invest in capital equipment purchases, and thus stimulate the economy,” noted Rona Rossier-Abel, Vice President-Finance at Steel King Industries. The Section 179 Qualifying Equipment deduction applies to businesses that spend less than $4,050,000 in capital equipment. Qualifying capital equipment tax deductions from purchases include equipment, machines, business vehicles, office equipment, computers, and software.
“If somebody is just starting out or if, for example, they’ve been in business for five years and they are investing less than $4 million in capital annually as they try to build their business – this might be a great deduction for them,” she says. “Once you get to be a mid- to large-size organization, the benefits start to go away, but that’s the intent of Section 179- it’s to stimulate small to medium size businesses to invest in capital improvements. Typically, capital improvements help drive business growth.”
The 2023 deduction limit under Section 179 has increased to $1,160,000, while the Bonus Depreciation stands at 80% this year. The Bonus Depreciation, which also is available for new and used equipment, can only be taken after the Section 179 deduction has been taken and applies to equipment acquisition costs that exceed the $1,160,000 Section 179 limit.
A company can only take the full deduction under Section 179 on equipment purchases of $2,890,000 or less. If purchases exceed that amount, the Section 179 deduction decreases dollar for dollar until it reaches zero at a purchase level of $4,050,000.
Corporate Structure Factors in Capital Equipment Tax Deductions & Savings
The tax savings a company could realize through Section 179 depends on how it is taxed, based on whether it is an S corporation, a C corporation, or an LLC, Rossier-Abel noted. But it can be sizable – hundreds of thousands of dollars, and it can foster ongoing benefits to the economy if a company invests its tax savings in the purchase of additional equipment, she says.
The deductions only can be factored in if a company reports taxable income; in unprofitable years, a qualifying amount could be carried over to subsequent years.
Besides the type of business entity, there are numerous other factors that play into determining the tax deduction benefits, so it’s essential for a company to work with its CPA or tax lawyer to determine whether it qualifies, and how to get the maximum benefits. A CPA or tax advisor should also be able to help determine the impact of first-year expenses on a company’s future-year tax obligations and on the book value of the equipment.
While some capital equipment tax deduction items might be readily available, a company might face long lead times for other equipment, so it’s important to plan early if you intend to realize tax deduction levels available for 2023 purchases, Rossier-Abel advises. “In some cases, you might find that lead times are months long, so it might not be possible to get the new equipment installed and operational by the end of the year, which is required to take advantage of the deduction benefits,” she adds.
Contact the experts at Steel King for more information and how we can help your business.