Depreciation, maintenance, and supplies are all write offs you can use to reduce your business’s tax burden at the end of the year.
We’ll break down essential write offs and deductions that you can take.
Before You Dive In
A tax write off lets you deduct certain expenses from your income, reducing taxes
Large equipment is expensive and has a limited useful life, you can deduct a portion of its value each year to reflect the aging process
Don’t be afraid to take write offs you’re entitled to. The tax savings can be very important for your company.
How to Write Off Equipment Used in a Small Business
When you purchase equipment for your company, you’re buying an asset. However, tools and equipment tend to wear down and become less reliable or useful as they age. You can use a few different methods to reflect this reduction in value of your equipment to take a tax write off. A qualified accountant will help you figure out the best way to write off equipment.
Depreciation is one of the most common and simplest ways to take a write off for equipment.
Imagine you buy a $1 million machine that you expect to last for ten years, at which point it will be broken down and worthless. In effect, you can assume that it loses 10% of its value each year. That lets you depreciate its value by $100,000 per year and take a tax write off for that amount every year until you depreciate its value to $0. Read our step-by-step guide on how to depreciate equipment to learn more.
Material and Supply Expensing
According to IRS rules, any piece of tangible property that costs $200 or less is considered materials and supplies and fully deductible in the year it is used. If you buy cheap supplies or tools, you can deduct the cost under this. You can read more about the difference between equipment and supplies in our other article.
De Minimis Safe Harbor Expensing
Under de minimis safe harbor expensing, businesses can take a full deduction for equipment that falls under a certain price and meets requirements. For example, if you buy a computer for $2,000, even if its useful life is multiple years, you can deduct the full price in the year you buy it.
For 2022, the requirements for de minimis safe harbor expensing is that each item cost $2,500 or less. Items under $2,500 and with a useful life of less than a year must be written off this way.
In general, if you spend money on maintaining a piece of equipment or machinery to keep it running, you can deduct the cost of that maintenance on your taxes. The exception is larger repairs or upgrades that can increase the equipment’s value.
Under the Tax Cuts and Jobs Act, business owners can fully deduct the cost of business property purchased between September 27, 2017 and January 1st, 2023. This is an alternative to typical depreciation schedules, allowing companies to get the full deduction upfront.
Companies can use bonus depreciation to deduct 50% of the cost of new equipment in the first year it is used, depreciating the other 50% of the value over the equipment’s normal life. This is another option to get a larger deduction upfront.
Section 179 Expensing
Section 179 expensing is a special depreciation tool available specifically to small businesses. It lets companies immediately deduct the full price of purchased assets instead of depreciating them normally.
To qualify, you can deduct no more than $1.08 million and cannot have purchased more than $2.7 million in the calendar year you’re taking the deduction.
Understanding Business Equipment Write-Offs
Like anything that involves taxes, writing off business equipment can get complicated. It’s important to make sure you understand the different deductions and write offs available.
What Is Section 179?
Section 179 is a portion of the tax code that lets small businesses deduct the full amount of an asset purchase in the year the assets go into use rather than depreciating the asset normally over time. This allows a larger upfront tax deduction.
What Does the Government Classify as Equipment?
According to the government, equipment is a non-expendable, tangible personal property that has a useful life of more than a year.
In short, if it’s something you’ll keep for a while and would be more inclined to repair than replace if it broke down, it’s probably equipment rather than something else.
Some examples of equipment include:
Kitchen equipment like an oven
Some things that wouldn’t be called equipment are:
Tools like wrenches or hammers
What Equipment Does Not Qualify for a Write Off?
In general, to write off equipment, that equipment must have some kind of business use and be used primarily for your business.
For example, if you own a small company and purchase a new car, you can’t write it off unless the car is used mostly for your company. The equipment also must meet other requirements, such as having a useful life of at least a year.
What Are the Qualifications for Equipment Write Off?
To qualify for a write off, equipment must:
Be used primarily by the business
Meet the definition of equipment (useful life of more than a year, be tangible, etc.)
Qualify for one or more of the ways to write off equipment (depreciation, unlimited expensing, section 179, etc.)
What are the Limitations of Business Equipment Deductions?
There are some limits on taking deductions for business equipment.
Of course, you can only take deductions for things that meet the definition of equipment, and you must follow all the rules when it comes to determining how much to deduct. For example, if you buy an expensive machine, you can’t choose to use section 179 to write off its cost unless it qualifies for section 179.
You’re also limited to writing off no more than your company’s total taxable income.
What’s the Deadline for Using Section 179?
To use section 179 to deduct business equipment, you must place the equipment into use on or before December 31st in the year for which you want to take the deduction.
How Can Small Businesses Benefit from Section 179?
Section 179 allows small businesses to deduct the full cost of a piece of equipment instead of depreciating it over multiple years. This creates a larger tax savings upfront.
Small businesses can use the money they save with the upfront deduction to finance other business operations or expand more quickly.
Is Leasing or Buying Better for Tax Write Offs?
While many companies choose to purchase the equipment they need to operate, leasing is also a popular option. Leasing, in many cases, is better for cash flow than buying. Both buying and leasing have advantages and disadvantages when it comes to taxes.
The Tax Advantages and Disadvantages of Leasing Equipment
In general, you can deduct the cost of equipment leasing as a business expense. However, the write offs you get for lease payments are usually lower than the write offs you can get on equipment you purchase. This is especially true given current tax law which allows full write offs of certain purchases.
The Tax Advantages and Disadvantages of Buying Equipment
When you buy equipment, you get the benefit of taking deductions for depreciation over the long term or even writing off the full price of the purchase. In general, these deductions will be larger than deductions you can take for lease payments.
Typically, companies that buy equipment use financing to make that purchase. There are limits to the amount you can deduct for interest charges – a maximum of 30% of your company’s adjustable taxable income. If you finance a large amount of equipment, you might not be able to write off all of your financing costs. You might like to visit our page about equipment financing options to learn more.
If you're not sure whether to purchase or to lease your equipment, read our article about equipment financing vs. leasing.
Special Considerations for Equipment Tax Write Offs
There are some unique situations that you have to keep in mind when writing off equipment.
Equipment Leased to Others
One unique deduction that leasing companies can take occurs when their clients end a lease and upgrade their equipment. Even if you have not fully depreciated the equipment you leased out, you may be able to deduct the remaining price if it is no longer marketable.
You can also write off missed lease payments as a loss and equipment repair costs.
Write-Off Rules for Vehicles
Business owners can take write offs for vehicles. For example, if you own a car but use it for your business, you can take a write off based on the miles you drive. Alternatively, you can track actual expenses, including the cost of gas, maintenance, tires, registration fees, insurance, and depreciation, and prorate it based on how often you use the car for your business.
Writing-Off Financing Costs
Financing costs, such as interest paid, are deductible as a business expense.
Reimbursement for Employee Equipment
If an employee purchases equipment to use primarily for business, the company can reimburse those costs and take a write off for the reimbursements.
State Tax vs Federal Tax Rules
Keep in mind that small businesses need to pay both federal and state taxes. There are fifty states, which means fifty different tax codes. It’s important to keep track of your local tax rules regarding the deductions your company can take. A good local accountant can help you figure out how your local taxes work.
Tips for Accurately Writing Off Business Equipment
Small business taxes are complex. Unless you’re a tax professional, you should work with a qualified accountant to help with your taxes and writing off equipment.
Know What Business Equipment Deductions You Qualify for
The most important thing to do is make sure you understand the tax code and which deductions you qualify for. If you miss a deduction or take the wrong deduction, you could be leaving huge amounts of money on the table.
Keep Detailed Records
Keeping detailed records is essential for two reasons.
First, a year is a long time. Without good records, you’ll forget about purchases and deduction opportunities, so make sure to have a record somewhere of what you’ve spent and what deductions you might be able to take.
Second, if the IRS chooses to audit you, your records are important to show the IRS that your write offs are all above-board.
Consult with a Tax Professional
If your company is at the point where it’s dealing with complex taxes and equipment write offs, it’s probably time to consult a tax professional. These pros can help you prepare your taxes and maximize your deductions, often saving you more than you spend on their service.