Investment Incentive: New tax law allows bonus depreciation on used equipment

Tax Prep on desk

Used equipment buyers are the recipients of expanded benefits with the passage of last year’s tax law, including the ability to combine Section 179 Expensing and first-year bonus depreciation. Previously, bonus depreciation was limited to new purchases only.

Section 179 Expensing by itself can be significant, and generally companies use this deduction first. The Tax Cut and Jobs Act doubled the deduction limit to $1 million on qualifying equipment purchases, including previously owned machinery. It also raised the spending cap to $2.5 million. Once that amount is reached, the deduction begins to decline on a dollar-for-dollar basis. Companies that spend more than $3.5 million lose the Section 179 Expensing deduction altogether.

To qualify for the deduction in the current tax year, machinery must be purchased or financed between January 1 and December 31 and placed into service. The latter is an important component and should factor into the timing of your buying decision. The machinery must be delivered and working before the clock strikes midnight and a new year begins.

WA270 wheel loader, loading dirt

Taking a closer look

For illustration, here are some Section 179 Expensing scenarios, which assume that used machinery is acquired and put into service:

  1. You purchased outright or financed up to $1 million worth of previously owned equipment this year. You can fully deduct that amount for the 2018 tax year. This will be the case through the end of 2022.
  2. Your acquisition was between $1 million and $2.5 million. You can still take a $1 million deduction.
  3. The purchase exceeds $2.5 million. The deduction is lowered dollar for dollar. For instance, if the total was $3 million – you can only claim $500,000, instead of $1 million.
  4. You bought more than $3.5 million in used equipment. The Section 179 deduction is no longer available.

In scenarios 2 and 3, you can now use bonus depreciation in addition to Section 179 to lower your tax bill. As an example, if you purchased $2 million in equipment, you can take the $1 million Section 179 deduction and use bonus depreciation to fully deduct the other $1 million. Your tax bracket determines your final actual cash savings.

For additional information, consult your tax adviser and see the online calculator at www.section179.org.

 

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