Get Ready for the Tax Benefits on 2023 Equipment Purchases!
It’s almost the end of the year! But don’t worry – there’s still time to take advantage of big tax breaks for buying or renting construction equipment before December 31.
One benefit is smaller than last year and coming to an end, but another has reached its highest level ever!
Here’s the rundown on the Section 179 tax deduction and bonus depreciation on equipment purchases for 2023:
Check out this chart from USBank showing the changes over the past 5 years for Section 179 and bonus depreciation.
Section 179 Still 100%
The Section 179 tax deduction is in place and has been made a permanent part of the tax code since it was raised to 100% in 2017. This means the entire cost of any new or used construction equipment you purchase or lease by the end of the year can be deducted from your business’ 2023 gross income.
The Section 179 deduction is also at its highest in history, after getting an $80,000 increase from last year. (Due to inflation, prices may be higher than in 2022.) For 2023, the maximum expense deduction has been raised to $1,160,000. The phaseout limit on the total amount of equipment it can be applied to has also increased to $2,890,000 from $2.7 million. The $1.16 million deduction drops dollar-for-dollar after reaching the $2.89 million limit and completely phases out at $4,050,000.
If you spent $3 million on equipment, you could not take the full $1.16 million deduction. The amount would decrease by $110,000, which is the amount exceeding the $2.89 million limit. Your deduction would reduce to $1.05 million.
Benefit Depreciation Drops 20%
Another significant benefit from the 2017 tax change has been 100% bonus depreciation on new and used equipment purchases.
2023 marks the first year of the phaseout of this benefit, and it will drop to 80% of the purchase price. The depreciation level decreases 20% each subsequent year until it ends January 1, 2027.
For small contractors, the drop in bonus depreciation may not be as big of a deal, if their purchases fall under the Section 179 caps.
Bonus depreciation is commonly used by larger contractors and can be applied to purchases larger than $2.89 million and even over the $4.05 million Section 179 cap.
Unlike Section 179, which is a deduction only on income, the bonus depreciation can be taken during years when the company experiences a loss.
How it Works
Volvo Construction Equipment shows an example of a 2023 equipment purchase and the potential tax benefits when combining Section 179 and bonus depreciation on its “The Scoop” blog:
Volvo CE
Things to Consider
As with any tax break, there are rules about which purchases qualify.
The equipment you buy in 2023 must be put into service for your business before midnight December 31 to qualify for Section 179 or bonus depreciation for this year.
