The year is almost over, but it’s not too late to take advantage of hefty tax breaks for buying or leasing construction equipment before December 31.
Though one benefit is significantly smaller than in 2022 and is on the way to extinction, another has risen to its highest level ever.
Here’s a look at the Section 179 tax deduction and bonus depreciation on equipment purchases for 2023:
This chart from USBank shows the changes over the past five years for Section 179 and bonus depreciation.USBank
Section 179 Still 100%
The Section 179 tax deduction remains in place and has been made a permanent part of the tax code since it was raised to 100% in 2017. That means the entire cost of any new or used construction equipment you purchase or lease between now and the end of the year can be deducted on your business’ 2023 gross income.
The Section 179 deduction is also the highest in its history, after getting an $80,000 boost from last year. (Of course, thanks to inflation, prices you’re likely to pay are also higher from 2022.) For 2023, the max expense deduction has been raised to $1,160,000. The phaseout threshold on the total amount of equipment it can be applied to has also risen to $2,890,000 from $2.7 million. The $1.16 million deduction drops dollar-for-dollar after meeting the $2.89 million threshold and completely phases out at $4,050,000.
For example, if you spent $3 million on equipment, you could not take the full $1.16 million deduction. The amount would drop by $110,000, which is the amount exceeding the $2.89 million threshold. Your deduction would decline to $1.05 million.
Bonus Depreciation Drops 20%
Another big benefit from the 2017 tax change has been 100% bonus depreciation on new and used equipment purchases.
But 2023 marks the first year of the phaseout of this benefit, and it will drop to 80% of the purchase price. The depreciation level declines 20% each subsequent year until it ends January 1, 2027.
For small contractors, the drop in bonus depreciation may not be as big of a deal, if their purchases fall under the Section 179 caps.
Bonus depreciation is more often used by larger contractors and can be applied for purchases larger than $2.89 million and even over the $4.05 million Section 179 cap.
Unlike Section 179, which is a deduction only on income, the bonus depreciation can be taken during years when the business suffers a loss.
How it Works
Volvo Construction Equipment displays the following example of a 2023 equipment purchase and the potential tax benefits when combining Section 179 and bonus depreciation on its “The Scoop” blog:
Volvo CE
Things to Consider
As with any tax break, there are rules about which purchases qualify.
First and foremost, the equipment you buy in 2023 must be put into service for your business before midnight December 31 to qualify for Section 179 or bonus depreciation for this year. There is no set amount of time the equipment has to be used in 2023 to qualify.
Of course, you can take both tax breaks in 2024, but bear in mind the bonus depreciation drops to 60% next year.
Contractors should also know that Section 179 and bonus depreciation are not just limited to construction equipment. Under certain conditions, vehicles, business software, computers, and manufacturing tools and equipment are among the other eligible expenses.
Before making any purchase decisions based on taxes, however, make sure you talk first to an accountant or tax adviser.
CPAs usually agree that making a purchase solely for tax purposes is rarely a good idea. The equipment should help your business become more profitable or efficient or both and make good business sense.
