Your contracting business can save money by depreciating your equipment.
- Rob Brown
- Dec 27, 2022
- 3 min read
How can I receive immediate tax savings on my equipment?
Section 179 of the Internal Revenue Code allows contractors to deduct the full purchase price of certain qualifying property, up to a certain limit, in the year that the property is placed in service. This can be a tax benefit for contractors because it allows them to fully deduct the cost of certain assets, such as equipment and vehicles, in the year of purchase rather than having to spread the deduction over the useful life of the asset through depreciation.
To qualify for the Section 179 deduction, the property must be used primarily for business purposes and must meet certain other requirements. The maximum deduction for the tax year 2022 is $1,080,000. Any qualifying property purchased and placed in service during the tax year more than this limit can be depreciated using the standard depreciation rules.
If your business is in its initial stages, the immediate deduction provided by Section 179 deduction can be particularly beneficial. It allows you to focus on growing your business without having to worry about a large tax bill at the end of the year.
How else can I depreciate my equipment?
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used to recover the cost of certain business assets over time. Under MACRS, the cost of an asset is recovered through a series of annual deductions that are based on the asset's useful life.
For contractors, MACRS can be a useful tool for claiming depreciation deductions on their equipment. To claim a MACRS depreciation deduction, the contractor must first determine the applicable recovery period for the asset. The recovery period is based on the asset's class life, which is determined by the IRS based on the type of asset and its expected useful life.
Once the recovery period has been determined, the contractor can use the appropriate MACRS depreciation tables to calculate the annual depreciation deduction for the asset. The MACRS tables provide a percentage that represents the portion of the asset's cost that can be recovered each year over the recovery period.
What are common classes used for construction equipment?
Construction equipment is typically classified into one of three classes for tax purposes: 5-year property, 7-year property, or 15-year property.
There are many different types of construction equipment that can be depreciated for tax purposes. Some common examples of construction equipment that can be depreciated include:
Heavy machinery
This includes equipment such as bulldozers, cranes, and excavators, which are typically classified as 7-year property.
Transportation equipment
This includes equipment like trucks, trailers, and buses, also classified as 7-year property.
Hand tools
This includes equipment such as hammers, wrenches, and saws, which are typically classified as 5-year property.
Power tools
This includes equipment such as drill presses, sanders, and grinders, which are also typically classified as 5-year property.
Safety equipment
This includes equipment such as hard hats, safety glasses, and respirators, which are also typically classified as 5-year property.
It's important to note that the specific classification of construction equipment can vary depending on the specific circumstances of the business and the specific rules that apply.
What tax benefits are available for equipment purchased under $2,500?
If your business incurs a purchase of equipment that is $2,500 or less, it can generally treat the purchase as a current period expense by using the safe harbor amount. The safe harbor amount is set by the IRS and is currently $2,500. Treating your purchase as an expense reduces your business's net income for the period, so expensing a purchase may result in lower tax liability for your business. If the purchase is over $2,500, you’ll need to determine whether it meets the criteria for capitalization, which means it would be recorded as a long-term asset and depreciated over time.
How can I start depreciating my equipment?
It's important to note that the specific classification of construction equipment can vary depending on the specific circumstances of the business and the specific rules that apply. It's always a good idea to work with a qualified tax professional to ensure that you are classifying your assets correctly for tax purposes.
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