Can You Write Off a Used Equipment Purchase?

Businesses often minimize taxable income through tax deductions for asset acquisitions. It is possible for businesses to write off the cost of used equipment, provided certain criteria are met. This article guides readers through the methods and requirements for deducting used equipment purchases.

Qualifying for Equipment Write-Offs

To qualify for a tax write-off, used equipment must meet specific IRS criteria. For tax purposes, “used equipment” refers to property that has been previously owned and used, but is new to the current taxpayer.

The equipment must be classified as “tangible personal property,” meaning it is a physical asset that can be moved, unlike real estate improvements or land. Examples include machinery, vehicles, office equipment, and tools. This property must also be used in an active trade or business to be eligible for deductions.

The equipment must be “placed in service” during the tax year the deduction is claimed. This means the equipment must be ready and available for its intended business use, regardless of when it was purchased. For instance, a machine bought in December but not ready for operation until January would be considered placed in service in January. Additionally, the equipment must primarily serve a business purpose, often requiring more than 50% business use for certain deductions.

Methods for Deducting Used Equipment

Businesses have several strategies for deducting the cost of used equipment. These methods allow for the recovery of the equipment’s cost over time, or in some cases, immediately. The three main approaches are the Section 179 Deduction, Bonus Depreciation, and the Modified Accelerated Cost Recovery System (MACRS).

The Section 179 Deduction enables businesses to expense the full purchase price of qualifying equipment in the year it is placed in service. Bonus Depreciation permits businesses to take an accelerated deduction for a significant portion of an asset’s cost in the first year. Alternatively, MACRS spreads the deduction of an asset’s cost over a predetermined number of years, reflecting the equipment’s useful life. Each method offers distinct advantages depending on a business’s specific financial situation and the type of equipment acquired.

The Section 179 Deduction

The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than depreciating it over several years. This immediate expensing can significantly reduce a business’s taxable income.

To qualify for Section 179, the property must be used in an active trade or business. Used property specifically qualifies, provided it was purchased for business use and was not acquired from a related party or previously used by the taxpayer. This means the equipment must be “new to the taxpayer” even if it’s not brand new.

There are annual dollar limits on the amount that can be expensed under Section 179. For tax years beginning in 2024, the maximum Section 179 expense deduction is $1,220,000. This deduction begins to phase out if the total cost of Section 179 property placed in service during the tax year exceeds a certain threshold, which is $3,050,000 for 2024. Once this investment limit is reached, the maximum deduction is reduced dollar-for-dollar by the amount exceeding the threshold.

The Section 179 deduction cannot exceed the business’s taxable income from the active conduct of any trade or business. Any amount that cannot be deducted due to this limitation can be carried forward to future tax years.

Bonus Depreciation and MACRS

Bonus Depreciation

Bonus depreciation allows businesses to deduct a substantial percentage of an asset’s cost in the year it is placed in service. For used property to qualify, it must be “new to the taxpayer,” meaning it was not previously used by the business or a related party, and must have been acquired by purchase.

The percentage allowed for bonus depreciation has been phasing down in recent years. For qualifying property placed in service in 2024, the bonus depreciation rate is 60%. This rate is scheduled to decline further in subsequent years, reaching 40% in 2025, 20% in 2026, and 0% for 2027 and beyond. Unlike Section 179, bonus depreciation is generally automatic for eligible property unless a taxpayer explicitly elects out of it.

MACRS (Modified Accelerated Cost Recovery System)

The Modified Accelerated Cost Recovery System (MACRS) is the standard method for depreciating most business property when Section 179 or bonus depreciation are not applied, or for the remaining basis after these deductions are taken. MACRS spreads the cost of an asset over a predetermined recovery period.

Under MACRS, assets are categorized into “asset classes,” each assigned a specific recovery period. Common business equipment often falls into 3-year, 5-year, or 7-year recovery periods. For example, computers and related equipment typically have a 5-year recovery period, while office furniture generally has a 7-year period. Depreciation conventions dictate how much depreciation can be claimed in the year the property is placed in service and the year it is disposed of.

These methods can be combined to maximize deductions. Typically, businesses first apply the Section 179 deduction. After that, bonus depreciation can be applied to any remaining basis. Finally, MACRS depreciation is used for any further remaining basis. This sequential application allows businesses to recover a significant portion of their equipment costs efficiently.

Claiming the Deduction and Record Keeping

Businesses report depreciation and Section 179 deductions primarily on IRS Form 4562, Depreciation and Amortization. This form is used to detail the cost of qualifying property, the date it was placed in service, and the calculated deduction amounts. Information from Form 4562 then flows to the business’s tax return, reducing its taxable income.

Record keeping is important when claiming these deductions, particularly for audit purposes. Businesses should retain purchase invoices or receipts that clearly show the cost of the equipment and the date of acquisition. It is important to document the exact date the equipment was placed in service, as this determines the tax year in which deductions can begin.

For equipment used for both business and personal purposes, such as a vehicle, detailed logs of business versus personal use are necessary to support the business use percentage claimed. Documentation supporting the business purpose of the equipment is also advisable. These records should generally be kept for at least three years from the date the tax return was filed, though longer retention periods may be prudent for significant assets.