Machinery Buyers Guide For Bonus Depreciation Tax Savings In 2021

Uncle Sam Wants To Help Buyers Of New & Used Machinery

Machinery plays a vital role in the U.S. economy, enabling industries to produce food, build infrastructure, construct homes and offices, and transport materials efficiently. These investments are essential for maintaining high productivity levels across various sectors.

Recognizing the importance of capital goods like machinery and research and development, Congress has provided preferential tax treatment to encourage continued investment. This includes incentives such as bonus depreciation, which helps businesses reduce their tax liability while upgrading their equipment fleets.

Bonus depreciation is a powerful tool that allows businesses to deduct a large portion of the cost of qualifying assets in the year they're purchased, rather than spreading it out over time. This encourages faster reinvestment and supports long-term economic growth.

What Types Of Purchases Qualify For Bonus Depreciation?

According to current IRS guidelines, qualified property includes tangible personal property with a recovery period of 20 years or less. Most heavy machinery, such as tractors, excavators, cranes, forklifts, and aerial work platforms, falls under this category. Used machinery also qualifies, provided it was not previously owned by the buyer.

It's important to note that real estate improvements, land purchases, and certain types of vehicles do not qualify for bonus depreciation. Additionally, farm equipment now has a shorter recovery period (five years), but this does not 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 follows a consistent schedule for financial reporting, tax depreciation can be accelerated. Bonus depreciation allows businesses to deduct 100% of the asset’s value in the first year, depending on the current tax law.

Tax professionals often recommend using Section 179 deductions first, followed by bonus depreciation on the remaining balance. This strategy maximizes tax savings and provides more flexibility for business owners.

The IRS allows taxpayers to opt out of bonus depreciation for a given year, but if they do, it applies to all similar assets purchased during that year. This ensures consistency in how businesses treat their equipment for tax purposes.

What Is Bonus Depreciation In 2021?

As of 2021, the bonus depreciation rate is 100% for qualifying assets. However, this rate is scheduled to decrease in the coming years, though new legislation could extend the full deduction. Congress regularly reviews and updates tax laws, so it's wise to stay informed about potential changes.

Here’s a breakdown of the bonus depreciation rates over the years:

Examples Of Bonus Depreciation For New & Used Machinery Purchases

Example 1: A used Caterpillar mini excavator costing $25,000 qualifies for full bonus depreciation. Since it was not previously owned and is used for business, it meets the criteria.

Example 2: A new HLA attachment for $3,000 can be fully deducted under bonus depreciation. Attachments used with machinery are also eligible.

Example 3: A John Deere tractor bought for $1,200 doesn't qualify because it's primarily for personal use. Bonus depreciation applies only when the asset is used for business.

Example 4: If you use Section 179 to cover the cost of a dozer, you cannot apply bonus depreciation to the same asset.

Example 5: If one truck qualifies for bonus depreciation, all similar trucks purchased in the same year must also qualify. You can’t choose selectively.

How Does Bonus Depreciation Work With Section 179?

Section 179 and bonus depreciation both help reduce tax liability, but they operate differently. Section 179 lets you expense the full cost of qualifying assets up to a limit, while bonus depreciation allows you to deduct a percentage of the asset’s value.

The key difference is that Section 179 treats the purchase as an expense, whereas bonus depreciation capitalizes the asset and depreciates it over time. Section 179 has a cap ($1.05 million in 2021), while bonus depreciation has no limit. Section 179 also allows for more flexibility in how you apply the deduction.

In 2021, with bonus depreciation at 100%, the two strategies are more aligned. However, in previous years, when bonus depreciation was limited, the differences were more pronounced. Combining both strategies can maximize your tax savings.

Important Note

This blog post is intended to provide general information about bonus depreciation and its application to machinery purchases. It is not a substitute for professional tax advice. Always consult a licensed tax accountant for guidance on your specific situation.

Tax laws and interpretations change frequently, and it's crucial to stay updated. Professional advisors keep track of these changes and can help you navigate the complex landscape of tax regulations.

Resources

IRS Form 4562 for depreciation
How a business owner got a free truck

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