Machinery Buyers Guide For Bonus Depreciation Tax Savings In 2021

Uncle Sam Wants To Help Buyers Of New & Used Machinery

Machinery plays a vital role in our economy. It's used to grow food, build infrastructure, and transport goods efficiently. Businesses rely on machinery to maintain high productivity levels and stay competitive. That’s why the government offers incentives like bonus depreciation to encourage investment in this essential equipment.

Congress recognizes that investing in capital goods—like machinery—and supporting research and development are key drivers of long-term economic growth. As a result, these investments often benefit from favorable tax treatment.

One such incentive is bonus depreciation, which allows businesses to deduct a larger portion of an asset’s cost in the year it's purchased. This encourages companies to invest in new and updated machinery, keeping their fleets modern and efficient.

What Types Of Purchases Qualify For Bonus Depreciation?

According to current IRS guidelines, qualified property includes tangible personal property with a recovery period of 20 years or less. Most heavy machinery, such as tractors, excavators, forklifts, cranes, and more, falls into this category. This makes it easier for businesses to claim significant deductions.

Used machinery also qualifies for bonus depreciation, provided it wasn’t previously owned by the buyer. This change came into effect after the 2017 tax law update, which made used equipment eligible for the same benefits as new purchases.

However, not all assets qualify. Real estate improvements, land purchases, and certain types of vehicles (like passenger cars) are excluded. Additionally, farm equipment has its own rules, with some items having shorter recovery periods than others.

How Is Bonus Depreciation Calculated?

Depreciation is the process of allocating the cost of a long-term asset over its useful life. While book depreciation follows a consistent schedule, tax depreciation can be accelerated, especially through bonus depreciation.

Taxpayers can choose to deduct 100% of the asset’s value in the year of purchase, depending on the current tax laws. This is particularly beneficial for businesses looking to reduce taxable income quickly. Many professionals recommend combining Section 179 deductions with bonus depreciation to maximize savings.

It's important to note that once you elect to apply bonus depreciation, you must do so for all similar assets purchased in the same year. You cannot pick and choose which items to apply it to.

What Is Bonus Depreciation In 2021?

In 2021, the bonus depreciation rate is 100%, meaning you can deduct the full cost of qualifying assets in the year they're placed in service. This rate was set to gradually decrease in future years, but new legislation could extend or adjust it.

Here's a breakdown of the bonus depreciation rates over the years:

Examples Of Bonus Depreciation For New & Used Machinery Purchases

Example 1: A business buys a used mini excavator for $25,000. Since it wasn't previously owned by the buyer and is used for business, the full amount qualifies for bonus depreciation.

Example 2: A new attachment for a machine costing $3,000 also qualifies, as it’s used in conjunction with the main equipment.

Example 3: If a tractor is mostly used for personal purposes, it doesn’t qualify. The primary use determines eligibility.

Example 4: If a business uses Section 179 to fully deduct an asset, bonus depreciation can't be applied to the same item.

Example 5: If one vehicle in a group is excluded from bonus depreciation, all similar vehicles must follow the same rule.

How Does Bonus Depreciation Work With Section 179?

Section 179 and bonus depreciation both help reduce taxable income, but they work differently. Section 179 allows you to deduct the full cost of an asset in the year it's purchased, treating it as an expense rather than a capital asset. Bonus depreciation, on the other hand, allows you to take an additional deduction beyond what Section 179 covers.

Section 179 has a dollar limit ($1.05 million in 2021), while bonus depreciation has no cap. This means businesses can combine both strategies to maximize their deductions. However, Section 179 gives more flexibility in how you apply the deduction, while bonus depreciation requires a uniform approach across similar assets.

Important Note

This blog post is intended for informational purposes only and should not be considered tax advice. Always consult a licensed tax professional before making any decisions about your taxes.

Tax laws can change frequently, and interpretations may vary. Professionals stay up-to-date with these changes to help you navigate the system effectively.

Resources

IRS Form 4562 for depreciation
How a business owner got a free truck

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