Tangible business assets include vehicles, equipment, and furniture. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. Depreciation ties the cost of using an asset with the benefit gained over its useful life. The IRS specifies the useful life of many types of assets under the Modified Accelerated Cost Recovery System (MACRS).
For example, if a realtor purchases a car to drive to showings for $30,000, the car would be depreciated over 5 years. Each year, depreciation would be deducted until the accumulated depreciation equals the purchase price.
However, taxpayers might prefer to deduct the full purchase price in the first year instead of over the useful life of the asset. Deducting the full cost of the asset would result in a lower taxable income and therefore a lower tax burden, leaving more cash on hand for investment in the business or for distributions to the owner during that year. Furthermore, the time value of money posits that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim.
In some cases, the taxpayer can elect to immediately expense the asset rather than following the rates outlined in MACRS. The tax code has this provision in place to encourage business owners to grow their business with the purchase of new equipment.
Section 179 of the Internal Revenue Code outlines the requirements for an immediate deduction. For 2022, the maximum deduction is limited to $1,800,000. The property must be placed into service during the tax year in which the deduction is being claimed. In our realtor example, placing the car into service would be driving it to a business appointment. Assets must be used for business purposes more than 50% of the time to qualify for Section 179 deductions.
If you have questions about the purchase of business assets or any other tax-saving opportunities, call our office at 480-392-6801.