How Small Businesses Write Off Equipment Purchases
As a small business owner, it’s important to make smart financial decisions to manage your expenses and maximize profits. One way to do this is to take advantage of the tax benefits available to small businesses. One such benefit is being able to write off equipment purchases. Here’s what you need to know about how small businesses can write off equipment purchases.
Before diving into the specifics of equipment purchases, it’s important to understand the concept of depreciation. Depreciation is the decrease in value of an asset over time due to wear and tear. It’s an accounting term used to reflect the decrease in value of assets on a company’s financial statements.
Writing off Equipment Purchases
When a small business makes an equipment purchase, the full cost of the equipment cannot be immediately written off as an expense. Instead, the cost of the equipment is depreciated over several years. This allows the small business to gradually write off the cost of the equipment as an expense, reducing their taxable income.
However, there are some instances where a small business may be able to write off the full cost of the equipment purchase in the year it was bought. This is known as a Section 179 deduction.
Section 179 Deduction
The Section 179 deduction allows small businesses to deduct the full cost of equipment purchases in the year they were bought, rather than depreciating the cost over several years. To qualify for this deduction, the equipment must be used for business purposes for more than 50% of the time and must have been purchased or financed during the tax year.
The Section 179 deduction has a limit of $1,040,000 for 2020 and $1,050,000 for 2021. This means that small businesses can only deduct up to this amount for equipment purchases in the year it was bought.
In addition to the Section 179 deduction, small businesses may also be eligible for bonus depreciation. This allows businesses to write off a certain percentage of the cost of the equipment in the year it was bought.
For 2020 and 2021, the bonus depreciation percentage is 100%. This means that small businesses can write off the full cost of the equipment purchase in the year it was bought, in addition to taking advantage of the Section 179 deduction.
Small businesses have options when it comes to writing off equipment purchases. By depreciating the cost of the equipment over several years or taking advantage of the Section 179 deduction or bonus depreciation, small businesses can reduce their taxable income and maximize their profits. It’s important for small business owners to consult with a tax professional to understand which option is best for their business and to ensure compliance with tax laws.