To write it off, or not to write it off? If you’re a contractor who regularly makes large equipment purchases, this can be a confusing question. It’s also an important one, as depreciation can be one of the most substantial expenses you face. Thankfully, accelerated depreciation gives you a way to potentially reduce your tax bill while acquiring the equipment you need. The rules surrounding it, however, can be hard to decipher.
Here’s what you should know about accelerated depreciation on construction equipment.
Consider an asset’s useful life.
Generally speaking, equipment or other property used in your trade or business that has a determinable useful life greater than one year needs to be capitalized. You can recover the cost of the asset through depreciation over an asset’s useful life.
Here are the useful lives for assets commonly used in the construction industry:
- Tractor units for over the road, software: 3 years
- Computers and peripherals, automobiles, other assets used in construction activities: 5 years
- Office furniture and equipment: 7 years
You don’t need to worry about depreciation for items up to $2,500. You can simply make an election to expense these on your tax returns and internal books.
Which type of accelerated depreciation applies?
Accelerated depreciation allows you to expense the full cost of an asset in the year you acquire it, meaning you can write off the full cost at once rather than spreading it out over the asset’s useful life. There are two types of accelerated depreciation—Section 179 and bonus—and it’s important to know which applies to your purchase.
Section 179 depreciation applies to property that is used more than 50% in the business and was purchased from an unrelated party. This type of depreciation is limited to your business taxable income. It allows you to expense up to $1,080,000 of property and begins phasing out dollar for dollar on $2,700,000 of eligible additions. These limits change year to year.
Bonus depreciation applies to property with a recovery period of 20 years or less. It does not come with income or property addition limitations. If you choose NOT to use bonus depreciation, you must elect out of it by asset class life.
Know which accelerated depreciation rules apply to you.
The tricky thing is, the rules surrounding each type of depreciation vary between federal and state, and from state to state. Many states do not conform to federal treatment. Minnesota, for instance, conforms to the federal rules for Section 179 depreciation but not for bonus. Instead, Minnesota adds back 80% of the total federal bonus depreciation and allows a 20% subtraction of the “add back” over the next five years.
What about vehicles?
- We often get questions about whether vehicles are eligible for accelerated depreciation. Here are a few important points:
Most passenger cars are not eligible for accelerated depreciation. However, vehicles that are not primarily used to carry passengers, such as dump trucks, flatbed trucks, and vans without rear passenger seating, may qualify.
SUVs are generally limited to $27,000 of accelerated depreciation under Section 179; however, you can expense the rest using bonus depreciation.
- Pickup trucks with beds of at least 6 feet long are typically not subject to any accelerated depreciation limits.
- Vehicle limitations tend to change from year to year, so it’s best to verify these amounts annually.
Make the most of accelerated depreciation.
If you’re unsure of how to take advantage of accelerated depreciation, JAK can help. We can also assist you in planning your capital expenditure budget and determining the tax benefits of purchasing large equipment. To learn more, contact us today.