Purchasing equipment before year-end can provide significant tax benefits due to depreciation rules. Depreciation allows businesses to deduct the cost of equipment over its useful life, but special provisions may allow for accelerated deductions. The main points to consider are:
- Eligibility for Deduction: To qualify, the equipment must be purchased and placed in service (ready for use) by December 31 of the tax year.
- Section 179 Deduction: Businesses can deduct the full purchase price of qualifying equipment up to a specific limit (e.g., around $1.2 million in 2024). This applies to new and used equipment, as long as it is not acquired from a related party.
- Bonus Depreciation phase out: It was 80% for 2023 and it is 60% for 2024. The phase out might be changed under President Trump’s second term.
- Normal Depreciation (MACRS): If Section 179 or bonus depreciation is not elected, businesses typically use the Modified Accelerated Cost Recovery System (MACRS) to spread deductions over several years based on the asset’s classification (e.g., 5 years for computers, 7 years for machinery).
A final recommendation is to always keep in mind if the asset (i.e. vehicle or machinery) would generate a positive return to the business. If we purchase a not needed vehicle just to pay less on taxes, then, we might save some taxes depending on our effective tax rate and depreciation. However, we will compromise business funds, liquidity or even increase debt if financed. In certain cases, it might be more beneficial to pay taxes and avoid unnecessary expenses.
In order to maximize the benefits (growth of the business and operational efficiency) and see if it makes sense from a cash flow point of view, reach out to our CPAs for further discussion.
