Section 179 and bonus depreciation are popular tax incentives used when buying equipment and machine technology solutions. Especially as year-end approaches, it is common for companies to look at late-season purchases to apply Section 179 and bonus depreciation.
Do you have all the information you need to know about Section 179 and bonus depreciation for equipment and technology? Most of the program parameters have stayed consistent since 2018. However, 2021 does have one update and one especially unique challenge that every equipment owner needs to know and consider.
Take a look at 10 frequently asked questions about section 179 and bonus depreciation.
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?
In 2021, both the spending cap and total deduction limit increased. The Section 179 total spending cap is phased out between $2.62 million and $3.67 million. Comparatively, in 2020 the phase out was between $2.59 million and $3.63 million.
The deduction limit is raised to $1.05 million, up from $1.04 million last year.
Once a company reaches the spending cap, the deductible amount is reduced dollar for dollar by the amount above the spending cap resulting in zero eligible 179 expense when $3.67 million of equipment is purchased.
3. 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 is also a valuable tax incentive. The two can be combined for maximum tax benefit. Both new and used equipment are eligible for bonus depreciation.
4. Is Bonus Depreciation Expected to Change?
In 2018, bonus depreciation was changed from 50 percent to 100 percent. It is expected to stay as-is until 2023, when it will begin phasing down, first to 80 percent, 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.
Watch to learn about one of the biggest technology opportunities, excavator automation:
6. Are New and Used Equipment Eligible for Section 179 and Bonus Depreciation?
Both new and used equipment is eligible for Section 179 and bonus depreciation. One thing that many are pleased to learn is that technology upgrades like GPS, machine control, and software are also eligible, both new and used.
7. Does the Term “Like-Kind Exchange” 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 2021?
This is one of the important things to know about Section 179, particularly for this year. To apply the deduction for tax year 2021, equipment must be financed or purchased and in service by midnight on December 31.
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In years past, this was not much of an issue. However, with equipment lead times at historic highs this year, the idea of buying something off the lot at the local equipment dealership is no longer likely. Ensure that any machine purchased with the intent of applying Section 179 or bonus depreciation can meet the requirement to be put in service by the end of the year.
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 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 is not needed – and especially if a company cannot afford it – the deductions and money-saving opportunities do not justify the investment. 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.
If it is 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 equipment or machine technology solution to fit needs, whether it is 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 parts and service support. Order parts online or in-store, pick up parts contact-free or have parts delivered. Various, customizable service options are offered 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.