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How Small Businesses Write Off Equipment Purchases

Article Highlights:

  • Depreciation
  • Materials & Supplies
  • De Minimis Safe Harbor Expensing
  • Routine Maintenance
  • Unlimited Expensing
  • Bonus Depreciation
  • Sec 179 Expensing
  • Mixing Methods

From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are a number of options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over a number of years using depreciation. The following are the write-off options currently available.

  • Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment.
  • Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost $200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated.
  • De Minimis Safe Harbor Expensing – IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. The $2,500 limit is increased to $5,000 for businesses that have an applicable financial statement, generally large businesses.
  • Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life.

 

Depreciable

Item

Class

Life

Depreciable

Life

Office Furnishings 10 7
Information Systems 6 5
Computers 6 5
Autos & Taxis 3 5
Light Trucks 4 5
Heavy Trucks 6 5

 

  • Unlimited Expensing – The Tax Cuts and Jobs Act passed in December 2017 ncludes a provision allowing 100% unlimited expensing of tangible business assets (except structures) acquired after September 27, 2017 and through 2022. Applies when a taxpayer first uses the asset (can be new or used property).
  • Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 50% of the cost of most new tangible property if it is placed in service during 2017. The remaining cost is deducted over the asset’s depreciable life. The 50% rate applies for new property placed in service prior to September 28, 2017 and, by election, to new or used property acquired and first put into use by the taxpayer after September 27, 2017 and before December 31, 2017.
  • Sec 179 Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is $510,000 for 2017 and $1 million for 2018. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($2,030,000 for 2017 and $2.5 million for 2018), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded.

An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.

  • Mixing Methods – A mixture of Sec. 179 expensing, bonus depreciation and regular depreciation can be used on a specific item, allowing just about any amount of write-off for the year for that asset.

For some individual taxpayers the alternative minimum tax (AMT) may be a concern. Bonus depreciation and Sec. 179 expensing are not preference items, and therefore their use will not trigger an AMT add-on tax. However, the difference between 200% MACRS depreciation, if claimed, and 150% MACRS depreciation is a preference item for AMT and could cause or add to the AMT tax.


Isler Northwest LLC is a firm of certified public accountants and business advisors based in Portland, Oregon. Our local, regional, and global resources, our expertise, and our emphasis on innovative solutions and continuity create value for our clients. Our service goals at Isler NW is to earn our clients’ trust as their primary business and financial advisors.

Isler Northwest

(503) 224-5321

1300 SW 5th Avenue
Suite 2900
Portland, Oregon 97201

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7 Passwords You Should Never Use at Your Small Business

Article Found on INC.COM

Owning a small business means owning data. You’re constantly acquiring new information related to your customers and financial details, as well as all the vendors and contractors with whom you work. However, one cybercriminal or one lucky hack can expose your business to a major blow. From lost trust among your clients to costly lawsuits for the damage done, protecting your company from data theft is among your most important responsibilities.

Much of this risk hinges on one simple choice you make: passwords. Read more

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Failing May Be Fundamental to Success, According to Columbia Business School

Article Found on Knowridge Science Report

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According to Rita McGrath, a professor at Columbia Business School and leading expert on strategy and disruption, there is an “intelligent way of failing” that can leave organizations stronger.

Professor Rita McGrath, Faculty Director and Associate Professor of Management at Columbia Business School, concluded that with a strategic approach, you can use failing work to your advantage. Failure doesn’t have to be a setback. When learning from it, it can point you in the right direction. Read more

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Article Featured on INC.COM

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Which country has the highest percentage of such people? You might be surprised that the United States is not at the top of the list of entrepreneurial countries. In fact, Vietnam, ranks highest among the 45 countries in the Amway Entrepreneurial Spirit Index (AESI). The U.S. ranked 12th, and Japan ranked last.
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Most Family Businesses Lack Succession Plans

Written by Michael Cohn | Featured on AccountingToday

Only 23 percent of family businesses have a robust succession plan in place, according to a new report from PricewaterhouseCoopers, with 46 percent of the family businesses polled saying they are reluctant to pass the business to the next generation.

The difficulties of succession planning in family businesses have come into stark relief with the high-profile case of Donald Trump. His decision to give control over his business empire to his sons Donald Jr. and Eric, with the likely continued involvement of his daughter Ivanka, has prompted concerns over whether it is enough to prevent a conflict of interest for an incoming president. Read more

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4 Ways to Improve Your Strategic Thinking Skills

Article by Nina Bowman | Featured on Harvard Business Review

If you’ve ever received feedback that you “need to be more strategic,” you know how frustrating it can feel. To add insult to injury, the feedback rarely comes with any concrete guidance on what to do about it. One of my coaching clients, Lisa, a vice president of HR, was in this situation and explains, “I was just told to think bigger picture and to be more strategic. It felt like I had been given the definition of a word by using the same word. It just wasn’t helpful.”

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Employers: Don’t Overlook the Small Business Health Care Tax Credit - Isler NW

Employers: Don’t Overlook the Small Business Health Care Tax Credit

IRS Tax Tip 2015-37, March 12, 2015

Do you own or run a small business or tax-exempt group with fewer than 25 full-time employees? If you do, you should know that the Small Business Health Care Tax Credit can help you provide insurance to your employees. You may be able to save on your taxes if you paid for at least half of their health insurance premiums. Here are several things that you should know about this important credit:

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