If you’re looking to put money back to your bottom line this year, your business could save thousands of dollars on new and used equipment purchases. Take advantage of available tax incentives created by the government to encourage businesses to buy equipment and invest in themselves. There are similar tax advantage opportunities in Canada as well.
Let’s start with the U.S. Section 179 of the IRS Tax Code, which offers eligible businesses a great opportunity to maximize purchasing power. Most of the new and used (must be new to you) equipment your business will purchase or finance will qualify for the Section 179 deduction. Section 179 allows you to deduct the FULL PURCHASE PRICE of qualifying equipment in the year it was put into service. This creates a larger initial expense deduction than using a standard depreciation method, thus reducing the tax burden for the company. Keep in mind, Section 179 cannot result in a net loss.
Section 179 Highlights for 2020 Include:
- Maximum amount that can be deducted is $1,040,000.
- Maximum amount of equipment purchased (and take the full deduction) is $2,590,000.
Section 168(k) allows for bonus depreciation (currently 100% expensing) on eligible equipment and property, thus allowing accelerated depreciation for a reduced tax burden, similar to the Section 179 deduction. A company can take both Section 179 and bonus depreciation allowances, but Section 179 must be applied first. Therefore, any qualified property purchased over the $1,040,000 limit may then be taken in bonus depreciation. So it’s great for businesses that spend more than the Section 179 spending limit. Bonus depreciation is scheduled to phase out over the next 7 years (see table below).
|PLACED IN SERVICE DATE||BONUS DEPRECIATION|
|September 28, 2017 to December 31, 2022||100%|
|January 1, 2023 to December 31, 2023||80%|
|January 1, 2024 to December 31, 2024||60%|
|January 1, 2025 to December 31, 2025||40%|
|January 1, 2026 to December 31, 2026||20%|
|January 1, 2027 and thereafter||0%|
Section 168(k) Bonus Depreciation Highlights for 2020 Include:
- Bonus depreciation has been increased to 100% (up from 50%) of the cost of both new equipment and used equipment (must be new to you) obtained through an unrelated third party between September 27, 2017, and January 1, 2023.
- Bonus depreciation is ideal for larger businesses who spend more than the $2.5 million purchase cap noted above.
- It’s also important to note that equipment must be used for business purposes more than 50% of the time to qualify for these deductions.
- Businesses with a net loss are still qualified to deduct the cost of new equipment and carry-forward the loss. In addition, new rules in the U.S. CARES Act generally allow corporations that generate a tax loss in 2020 to carry back the loss 5 years — purchasing equipment before yearend that’s eligible for bonus depreciation could help to create or increase a 2020 loss that could in turn lead to a cash refund of prior year taxes (potentially including taxes paid at the higher 35% corporate rate that applied before 2018).
Let’s look at the tax savings introduced by bonus depreciation, along with Section 179.
|NEW/USED EQUIPMENT||TAX YEAR 2020|
|Section 179 Deduction||$1,040,000|
|Bonus Depreciation (100% of Depreciable Amount)||$460,000|
|Total First-Year Deduction||$1,500,000|
|Total First-Year Tax Savings (Section 179 and Bonus Depreciation)||$315,000|
|Tax Savings using Section 179 Only||$1,040,000 x .21 = $218,400|
Before you take Section 179 and/or bonus depreciation deductions, consult with your tax or legal advisor.
In Canada, the Department of Finance has updated the Capital Cost Allowance to allow businesses to immediately expense 100% of the cost of certain new machines that are purchased before 2028 — so this applies to 2020. Under new Accelerated Investment Incentive rules, Canadian businesses are also eligible for an enhanced tax depreciation write-off in 2020 of up to 3 times the amount that would normally apply. For example, if a business purchased equipment for $100,000 and utilized the machine that year, it would be eligible for a first-year write off of $10,000 (10% of the capital cost of the equipment). Under the new rules, the business can now claim tax depreciation in the first year of $30,000 (3 times the original amount).
Now’s a great time to take advantage of higher first-year depreciation.
If you’re looking to finance or lease a new machine, we’ve recently introduced several new equipment models that feature the impressive performance, efficiency and reliability you’ve come to expect from Volvo — including our new, 20-ton EC200E crawler excavator. To take advantage of Section 179 and bonus depreciation in the U.S. this year, your equipment must be purchased and put into service between Jan. 1, 2020, and midnight on Dec. 31, 2020.
To get started with a used machine, check out our used equipment inventory and find high-quality Volvo machinery at lower prices. Machines listed under the Volvo Certified Used section allow customers to buy pre-owned machines that have been thoroughly inspected to ensure long-lasting performance.
If you have additional questions about the advantages of Section 179 and bonus deprecation, check out these FAQs or talk to your local tax advisor.
Disclaimer: U.S. and Canadian tax incentives are complicated. There are many limits, exclusions and special rules for different types of businesses in each country. The information in this article, and on this site, is not and should not be construed as tax or legal advice. Each business situation is different and tax regulations change frequently. We strongly recommend that you consult with your tax advisor regarding how these tax-saving opportunities apply in your situation.
By Agako Nouch, Vice President, Sales, and Ryan Sherwood, Vice President, Retail Development