Buying equipment? Here’s how to get your full tax-break upfront.

Like tax breaks? You’ll love this.

Tax deductions based on depreciation are useful for any business, especially those in transportation, distribution, logistics and manufacturing, where companies regularly invest in equipment and other property.

But what if you didn’t have to wait years for your deduction? What if you could take advantage of your entire tax-break upfront?

With accelerated depreciation, you can.

Due to 2020’s updated depreciation rules, businesses now have two ways to get an asset’s full depreciation upfront: Section 179 and bonus depreciation. By taking advantage of these regulations, your business can reap huge tax savings in the first year of an investment and use the capital you save to cover the asset’s expenses and make additional investments.

Section 179 vs. bonus depreciation

Both Section 179 and bonus depreciation are types of accelerated depreciation. Unlike regular depreciation, which spreads tax breaks over the years as an asset depreciates, accelerated depreciation allows you to obtain up to 100% of the asset’s total value upfront.

Section 179 allows businesses to deduct up to the full purchase price of equipment or qualified leasehold improvements in the year it was put into service. It’s extremely flexible, allowing you to choose which purchases to cover and which to save for future years. You can even split the deduction of a single purchase. For example, if you bought a $60,000 truck for your logistics company, you could deduct $30,000 now and apply $30,000 to next year’s taxes.

But it does have its limits; if total equipment purchases exceed $2.7M, then tax savings begin to decrease dollar-for-dollar. In 2022, the maximum Section 179 deduction is $1,080,000 and cannot exceed your business’ income. Because of these limits, Section 179 isn’t particularly useful for large organizations, but it’s a boon for small and mid-sized companies looking for big tax savings.

Similarly, Section 168(k) allows for up to 100% bonus depreciation on eligible assets. Unlike Section 179, there is no annual limit on deductions based on bonus depreciation; you can deduct your full investment, even if it exceeds your entire business income.

The catch is that bonus depreciation is less flexible than Section 179. Bonus depreciation must apply to all assets, it must cover 100% of an individual asset’s cost – you can’t split it – and all assets under bonus depreciation must belong to the same category.

State income taxes also need to be considered. While most states allow section 179, many states – including Illinois – do not allow bonus depreciation. Consequently, if bonus depreciation is claimed, there will be an addback for state income tax purposes for the excess bonus depreciation over regular depreciation. No such addback is required under Section 179.

What’s the catch?

While both Section 179 and bonus depreciation allow you to save on your taxes in the first year of your investment, this could result in less tax savings in future years. However, having extra capital now could be essential to your company’s growth and ability to cover additional expenses and investments. We recommend consulting with your financial advisor to determine the right way to take advantage of accelerated depreciation.

60-second summary

  • Both bonus depreciation and Section 179 allow businesses to reap huge tax savings by applying an asset’s total depreciation value upfront.
  • Section 179 is more flexible in terms of timing and application, but more restrictive with annual limits.
  • Bonus depreciation has no limit on deductions, but it’s less flexible and must apply to all assets in a category.
  • Section 179 could result in a larger state deduction than bonus depreciation.
  • Both forms of accelerated depreciation can be applied to a variety of equipment, including company vehicles.
  • It’s important to weigh the pros and cons of accelerated depreciation. While most businesses would like to take advantage of tax savings now, doing so could result in less savings in future years.

We’ll help you maximize your savings and plan for the future.

With nearly 50 years of experience serving businesses in the Chicagoland region, D+L can help you not only maximum your tax savings, but develop a strategic plan, make critical decisions, and position your business for future success. Learn more about our tax compliance and planning services, explore outsourced accounting, or connect with our team today.

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