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Uncle Sam Wants To Help Buyers Of New & Used Machinery
Machinery plays a crucial role in our economy. It's the backbone of agriculture, construction, manufacturing, and logistics. Whether it's a combine in a field or a forklift in a warehouse, machinery helps us produce goods, build infrastructure, and move materials efficiently. These investments are essential to maintaining high productivity levels across industries.
Congress understands that investing in capital equipment like machinery and research and development is key to long-term economic growth. That’s why these types of purchases often receive favorable tax treatment, helping businesses grow and innovate.
One such benefit is bonus depreciation, which allows businesses to deduct a large portion of the cost of new or used machinery in the year it's purchased. This encourages companies to invest in modern, efficient equipment, ultimately boosting productivity and competitiveness.
What Types Of Purchases Qualify For Bonus Depreciation?
Under current IRS guidelines, bonus depreciation applies to tangible personal property with a recovery period of 20 years or less. Most heavy machinery qualifies, including tractors, excavators, cranes, forklifts, and more. Even used equipment can qualify as long as it wasn’t previously owned by the buyer.
The 2017 tax law update changed the rules for used machinery. Previously, only new machinery was eligible, but now used equipment can also benefit, provided it's not previously owned by the taxpayer. However, real estate improvements, land, and certain vehicles don't qualify for bonus depreciation.
Farm equipment also saw changes in the 2017 law. The recovery period for farming machinery was reduced from seven to five years, but this doesn’t apply to items like grain bins or fences.
How Is Bonus Depreciation Calculated?
Depreciation is the process of allocating the cost of an asset over its useful life. While book depreciation is used for financial reporting, tax depreciation allows for faster deductions through methods like bonus depreciation.
In 2021, the bonus depreciation rate is 100% for qualifying assets. This means you can deduct the full cost of the machinery in the year it's purchased. If combined with Section 179 deductions, the strategy usually involves applying the full Section 179 limit first, then using bonus depreciation on the remaining balance.
It's important to note that once you elect to take bonus depreciation, you must apply it to all similar assets purchased in the same year.
What Is Bonus Depreciation In 2021?
As of 2021, the bonus depreciation rate is 100% for qualified property. This rate is set to gradually decrease over the next few years, but future laws could extend the 100% rate. Congress reviews tax policies annually, so changes are possible.
Here’s a breakdown of the scheduled bonus depreciation rates:
Year
Bonus Depreciation Deduction
2017
100%
2018
100%
2019
100%
2020
100%
2021
100%
2022
100%
2023
100%
2024
80%
2025
60%
2026
40%
2027
20%
2028+
0%
Examples Of Bonus Depreciation For New & Used Machinery Purchases
**Example 1:** You purchase a used Caterpillar 301.8 mini excavator for $25,000. Since you didn’t own it before and it’s used for business, you can deduct the full amount via bonus depreciation.
**Example 2:** A new HLA attachment for your machine costs $3,000. This qualifies for bonus depreciation as well.
**Example 3:** If you buy a John Deere lawn tractor for $1,200, but use it mostly for personal purposes, it won’t qualify for bonus depreciation.
**Example 4:** If you use Section 179 to fully deduct a dozer, you can’t also take bonus depreciation on the same asset.
**Example 5:** If you choose not to apply bonus depreciation to one truck, you must apply the same rule to all similar assets purchased in the same year.
How Does Bonus Depreciation Work With Section 179?
Section 179 and bonus depreciation both help reduce tax liability, but they work differently. Section 179 lets you deduct the full cost of qualifying purchases as an expense, rather than depreciating it over time. This is especially beneficial for small and medium-sized businesses.
Bonus depreciation, on the other hand, allows you to write off a percentage of the asset’s value in the year it’s purchased. In 2021, that percentage is 100%, making it more aligned with Section 179.
Key differences include:
- Section 179 is treated as an expense; bonus depreciation is part of the asset’s cost.
- Section 179 has a fixed deduction limit ($1.05 million in 2021), while bonus depreciation has no cap.
- Section 179 is aimed at smaller businesses, while bonus depreciation is available to all.
- Section 179 offers more flexibility in how you apply deductions, while bonus depreciation must be applied to all similar assets.
Important Note
This blog post is for informational purposes only and should not be considered tax advice. Always consult a licensed tax professional for guidance on your specific situation. Laws change, and interpretations may vary, so it's important to stay informed and seek expert advice.
Resources
- IRS Form 4562 for depreciation
- How a business owner got a free truck
- [YouTube Video](https://www.youtube.com/watch?v=example) (example link)
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