Section 179 and bonus depreciation are popular tax incentives used when buying equipment. Especially as year-end approaches, it’s common for companies to look at late-season purchases to apply Section 179 and bonus depreciation.
Even though both opportunities have been around for years, many companies and equipment owners have questions about the incentives and how they work. Some of these questions have evolved throughout the years as details of the program have changed.
However, most of the program parameters have stayed consistent since 2018, making these 10 frequently asked questions about section 179 and bonus depreciation a valuable read for anyone considering applying the incentives to a purchase.
But one thing first: When thinking about Section 179 and bonus depreciation, don’t forget – every company’s financial situation is different. All business owners should consult their accountant or trusted tax advisor before deciding to take advantage of incentives.
1. What Is Section 179?
Section 179 is designed to encourage companies to invest in themselves and grow their operations with equipment and technology purchases. The incentive allows the purchaser to deduct the full cost of the equipment in the year of purchase.
2. Is There a Spending Cap and Total Deduction Limit?
While most details of Section 179 remain unchanged from 2019, 2020 saw increases in both the spending cap and total deduction limit. At this time, the Section 179 total spending cap is $2.59 million and the deduction limit is raised to $1.04 million.
Once a company reaches the spending cap, the deductible amount is reduced dollar for dollar by the amount above the ending cap resulting in zero eligible 179 expense when $3.63 million of equipment is purchased.
3. “Bonus Depreciation” is Often Mentioned with Section 179 – What Is Bonus Depreciation?
Bonus depreciation, also known as the additional first year depreciation deduction, has often been used hand-in-hand with Section 179, as it’s also a valuable tax incentive. The two can be combined for maximum tax benefit. There were two key changes made to bonus depreciation in 2018: The percentage increased from 50% to 100% and included the purchase of used equipment.
4. Is Bonus Depreciation Expected to Change Again?
In 2018, bonus depreciation was changed from 50% to 100%. It’s expected to stay as-is for five years, then, in 2023, begin phasing down, first to 80%, then to 60%, 40%, and 20% in subsequent years.
5. What Types of Purchases Qualify for Section 179?
Tangible, movable items are eligible for Section 179 deduction. This includes equipment, technology and software, and some business-use vehicles. However, not every potential purchase gets the green light. Common assets like additional farmland or buildings do not qualify for Section 179 deduction.
6. Are Section 179 and Bonus Depreciation Only Applicable to New Equipment and Technology?
As most would imagine, new equipment is eligible for Section 179 and bonus depreciation. Used machines are also eligible opportunities for the incentives. Technology upgrades like GPS, machine control, and software are also eligible, both new and used.
7. I’ve Heard the Term “Like-Kind Exchange” – Does That Apply to Section 179?
Like-Kind Exchange is no longer relevant or applicable to Section 179. Part of 2018 tax reform included a repeal of Like-Kind Exchange for equipment.
8. What’s the Date Range to Apply Section 179 in 2020?
To apply the deduction for tax year 2020, equipment must be financed or purchased within the calendar year – purchases become eligible when made on or after January 1, 2020, all the way up until the last day of the year. Within the date range, a machine, technology solution, or software must be placed in service – essentially, delivered to a company or jobsite, ready to go to work – before midnight on December 31, 2020 to be eligible.
Keep in mind any equipment purchases made in the calendar year, with the intent to apply Section 179, may already have used the deduction to its full potential.
9. Can This Year’s Section 179 Deduction Be Held Until Future Years?
A Section 179 deduction can be held until the following year and there may be reasons to consider doing so. For example, a business in a lower tax bracket now but looking to grow might want to hold off on deducting all its equipment purchases by not taking Section 179 on the acquisition. Instead, the deduction could be spread out over time (likely five years) through depreciation deductions.
10. How Do I Know if Section 179 and Bonus Depreciation Are Right for My Business?
Taking advantage of even the most valuable incentives might not be the right decision for every company, every year. If a machine, new technology solution, or software isn’t needed – and especially if a company can’t afford it – the deductions and money-saving opportunities may not be enough to justify the investment. All companies should consult their accountant or trusted tax advisor before deciding to move ahead with a purchase to apply Section 179 and bonus depreciation.
If it’s decided that a purchase is the right choice, farmers, contractors, and other equipment buyers can look to a trusted dealership for help. RDO Equipment Co.’s experts will help those interested find the right machine to fit needs, whether it’s new or used, a lease option, or even rent-to-purchase agreement.
And because equipment and technology should always be viewed as long-term investment, RDO also offers full, contact-free parts support, as well as various, customizable service options to keep the investment solid, long after the sale.
About the Author
Bill Nielsen is Director of Tax for RDO Equipment Co.’s parent company, R.D. Offutt Company.
Learn more about applying the Section 179 and bonus depreciation tax incentives, including a special Section 179 calculator. To see new, used, and rental equipment options, contact your local RDO Equipment Co. store.