Running a successful business involves the purchase and usage of equipment. This equipment has tax implications in the year a business purchases it, as well as every year after that. Physical hardware is a depreciating asset, which means it decreases in value over time. This is due to usage, newer releases, and even damage. The Internal Revenue Service (IRS) provides tax deductions (even tax write-offs) for equipment purchases, depreciating assets, and more. Deducting the right purchases can lower tax liability and keep more operating capital in the business for next year. It’s accomplished through the Tax Cuts and Jobs Act of 2017, specifically Section 179. This tax act gave significant tax write-offs to businesses. It relieves growing pains and provides breathing room for America’s companies. Leveraging these deductions as much as possible can maximize profitability. It’s a lot easier than it sounds, too.
Tax Deductions for Equipment Purchases
The tax new cuts increased tax benefits for businesses buying and using equipment. Tax deduction limits were set at $1 million per purchase up to $2.5 million in 2018, and those limits are indexed for inflation. This includes nonresidential building improvements, vehicles, and equipment purchases that meet two IRS requirements:
- Qualified property needs to be “tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.”
- Qualified property needs to bepurchased and put into service within the year the tax deduction is claimed. This means it must be fully functional and in business use.
The possibilities are endless. They include improvements to existing HVAC, security systems, fire suppression, property, furniture, and more. You can even deduct business supplies and software. This tax law gives businesses new opportunities to expand operations without the expense becoming a burden. Of course, the purchase must be for business purposes to qualify as a tax write-off. It’s essential to know the difference between equipment and supplies. The tax deduction (and accounting listing) will be different for each type of purchase. One is for short term, while the other is a long-term expense.
Differences Between Expensing and Depreciating
Business supplies and equipment are two different things, both in practicality and for tax purposes. Supplies, like paper and toner, are immediate consumable assets. Companies use these assets until the supply runs out. Equipment, like multi-function printers, workstations, and office desks/chairs, are long-term assets that depreciate over time.
Supplies are bought and used continuously. This includes staples, paper, ink, highlighters, Post-It notes, packaging/shipping resources, and even coffee for the break room. These supplies are inventoried, but that inventory is constantly rotating. Expensing is the treatment of these costs as an operating cost rather than a capital investment. They show up as “small tools and equipment” on tax returns. On accounting sheets, they fall under “current assets”. Their purchase counts as a part of the cost of goods sold, which ultimately affects overhead and profit margins.
Equipment is tangible property that a business owns for long-term usage. This includes furniture, fixtures, automobiles, electronic devices, computers, and document machines like printers, scanners, fax machines, and copiers. They have a high up-front cost but depreciate over time, as parts wear out. It’s typical for businesses to calculate the depreciating value of business equipment purchases when figuring out tax deductions and write-offs. These are capital assets, also known as fixed assets. This is the equipment that businesses use in order to make a profit. Both taxes and accounting handle capital gains and losses differently than sales revenue. While sales tax typically applies immediately to supplies, many businesses choose to factor depreciating values into equipment purchases. Instead of immediate tax write-offs, the company takes a smaller tax deduction each year. This offsets the depreciating cost of the asset.
Gaining a Tax Deduction on Equipment Purchases
Receipts and documentation are the key to tax write-offs for equipment purchases. It’s important to maintain documentation of the purchase documentation, as well as the equipment usage for business. From there, an accountant can list these purchases and elect to take the Section 179 tax deduction. This is done on IRS Form 4562, which requires listing the information on when the equipment was purchased and began business use. The IRS has instructions for filling out the forms, as well as detailed guidelines on which qualifying equipment purchases businesses can deduct. Section 179 is a useful tax law for any business owner to understand. Businesses are already expensing office supplies in large volumes. Equipment purchases are major costs, and offsetting the depreciating value is vital. Accounting for all of these assets relieves tax liability, lowers bills, and provides liquidity to keep business operating throughout the year.
Contact Mac Copy today to speak with a professional consultant and learn more about the tax write-offs you qualify for on your equipment purchases. There’s no better time to start than now.