Running a construction company requires purchasing new equipment to complete contracted jobs. Machinery, vehicles, tools, and other assets are essential to keeping your construction business running, and the cost of these items significantly impacts your business’s future profits.
It can be challenging to balance the upfront costs of equipment and construction assets against your yearly income, especially if these assets depreciate over time. In many cases, gradual deductions on depreciable construction equipment are not enough to offset the upfront costs of purchasing that equipment in the first place.
Construction companies can take out a Section 179 deduction for the entire cost of a depreciable business asset in one tax year. Discover the benefits of Section 179 deductions and how you can use it to maximize your business’s tax liability.
What is Section 179 Deduction?
A Section 179 deduction is a special tax deduction allowed by the IRS for tangible assets used to run your business. Typically, business owners can file deductions on physical assets like machinery and equipment, but these deductions are spread out over five years as the assets’ value depreciates.
A Section 179 deduction allows business owners to receive a single, larger tax deduction on the entire cost of the depreciable asset in the same tax year in which they purchased the asset. This significantly lowers your taxable income, reducing your tax liability and allowing you to buy the equipment you need to run your company.
In 2022, businesses can deduct up to $1,080,000 worth of equipment in a Section 179 deduction. However, the $1,080,000 limit may be reduced if the cost of the assets you deduct through Section 179 exceeds $2,700,000.
How does Section 170 Work?
In general, tax deductions work by lowering your income and reducing your tax liability. More significant deductions allow you to keep more of your business’s income for that tax year. Section 179 allows an immediate deduction of the entire cost of depreciable assets, like construction equipment or vehicles, within the same year of the purchase.
Without a section 179 deduction, you would deduct the cost of your depreciable assets in smaller portions of their total cost over the period in which they depreciated. Section 179 essentially moves the anticipated depreciation deduction up five years so you can immediately write off the expense and continue to grow your business without a heavy tax burden.
The advantage of the Section 179 deduction is that it provides smaller construction businesses with much larger tax relief upfront. The deduction is designed to support small businesses that need to purchase expensive items at once by reducing their tax liability.
Who qualifies for Section 179?
Section 179 deductions are intended primarily for small businesses, especially new startup companies with tangible asset expenses like machinery. You likely qualify for a Section 179 deduction if you:
● Own the property you are reporting for the deduction
● You use the equipment for business or income-producing activities
● The equipment you own is expected to last over one year
● The equipment has a determinable use life
To qualify for Section 179, you must also keep appropriate records regarding your business property. These records may include receipts and records of the purchase price of the machinery, the cost of maintenance, and the business investment purpose.
What type of equipment does Section 179 cover?
The Section 179 deduction specifically covers depreciable property such as machinery, vehicles, office equipment, and computers. For a piece of equipment to qualify for a Section 179 deduction, it must be purchased between January 1 and December 31 of that tax year. Additionally, you must use the equipment in the fiscal year you claim the deduction.
Equipment or machinery must be a physical asset used in the active course of business and experience depreciation during normal usage. It must also be used more than 50% of the time for business purposes to qualify for a Section 179 deduction.
As a construction company owner, you can claim a Section 179 deduction on construction equipment like:
● Backhoe loaders
● Heavy excavators
● Forklifts
● Access platforms
● Track loaders
● Dumpers
Pros and Cons of a Section 179 Deduction
The biggest advantage of the Section 179 deduction is the significant tax relief that it provides in the short term. If you take out a Section 179 deduction on depreciable equipment, you will get a larger deduction on your purchases in one year. This will provide you with larger tax savings in the short term, allowing you to offset the cost of several equipment purchases at once.
For example, your company buys $200,000 worth of professional construction equipment in 2022. You can write off or deduct the entire $200,000 if your equipment meets the Section 179 requirements. Assuming a tax bracket of 35%, you’d save $70,000 on the equipment purchase ($200,000 x .35), making the total cost of the equipment $130,000.
One potential downside to taking a Section 179 deduction is that it may push your company into a lower tax bracket. If you take out a larger initial deduction on your purchases, the deduction may offset later income that might have been taxed at a lower rate.
Work with your business tax advisor to determine if you can benefit from a Section 179 deduction.
Let us help you take advantage of the Section 179 Deduction
If you’re the owner of a construction company, a Section 179 deduction is a tax strategy for times when you need to purchase large amounts of depreciable equipment at once. When you work with your accountant to use a Section 179 deduction and save money, you can focus more of your time and energy on finding the best construction equipment, vehicles, and machinery for the job.
Monk JCB has provided business owners with high-quality heavy construction equipment for over three decades. Browse our equipment showroom online or speak to one of our associates at (281) 982-9030 to find the right construction machinery for your company.
