The Bonus Depreciation, a popular tax deduction that was included in the Tax Cut and Jobs Act of 2017, begins its scheduled phaseout in 2023. Financial experts share tactics contractors can implement to “soften the blow.”
Try Section 179…
Contractors who have been relying on the Bonus Depreciation for a tax deduction will want to start plotting out alternative tactics. As Dan Furman of Crest Capital reminds us:
The Tax Cut and Jobs Act of 2017 expanded Bonus Depreciation to 100% of an item’s purchase price, and it has been at that level since. This means a company could depreciate and write off the entire cost of purchases in the year they were acquired (as opposed to taking smaller depreciation amounts each year). This had a marked effect on lowering the tax obligations of companies who purchased equipment.
The phaseout, planned since the onset of the Bonus Depreciation, still allows for an 80% write off in 2023 and experts suggest that it may benefit contractors planning an equipment purchase in 2024 to go ahead and do so in 2023, since “80% is better than 2024’s 60%.” It’s likely also time to get to clarity on Section 179. Although Section 179 has limits, which the Bonus Depreciation does not, it can still be a very helpful tactic for tax deductions, especially when used in tandem with the Bonus Depreciation. Pros note “Only companies that show a profit can use Section 179,” and offer these additional pointers:
For 2023, Section 179 has a deduction limit of $1.16 million. The “total equipment purchased” limit is $2.89 million. Once that spending limit is reached, the deduction reduces dollar-for-dollar until it disappears (so Section 179 disappears entirely once a company spends $4.050 million on equipment).But there are no limits on Bonus Depreciation. A company may spend as much as they wish on equipment and use Bonus Depreciation on all of it. The two can also be used together. Companies can take the maximum Section 179 deduction and then use Bonus Depreciation on the rest.
Both Section 179 and Bonus Depreciation can be used for almost any new or preowned equipment.Trucks, heavy equipment, machines, IT, office equipment, furniture, signage, and even most software. But certain building improvements are also eligible for Section 179. These include security systems, fire suppression, HVAC, and similar. Bonus Depreciation cannot be used for these.
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Consider Leasing
As the Bonus Depreciation phases out, it may make more sense lease equipment rather then lay out money to purchase it. Some experts also point out that competing in today’s uncertain environment requires a strong balance sheet. Toward that end, when making equipment decisions, Gary Bartecki of GB Financial Services suggests: “CapEx expenditures need to be carefully considered before you sign your name to the contract.You may want to ask the rental companies you use to rent you one of these new products to see how it works before you commit to a purchase. Or, you may want to rent until the pricing comes down to more realistic prices….”
Find more advice to inform equipment spending decisions right here, and get additional insights on your tax strategy right here. Don’t forget, Colonial Surety is here to arm you with financial intel too, via the complimentary services of The Partnership Account® for Contractors. Once qualified, you will use our powers of attorney to issue your own bid bond—and you can do so right up to the last moment you need it. With Colonial, owners also have a private digital dashboard, providing a day to day snapshot of single and aggregate limits, as well as current and available bond capacity. As work in progress decreases, work on hand can be updated, increasing the aggregate. The result? Yes, you can go ahead and move that next bid ahead.
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Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.