Can You Write Off Used Equipment for Your Business?

When running a business, managing expenses is a regular part of operations, and equipment purchases often represent substantial costs. The Internal Revenue Service (IRS) allows deductions for business equipment, including used items. These deductions can significantly reduce a business’s taxable income, thereby lowering its tax liability. Understanding the specific rules and methods for these write-offs is important for maximizing tax benefits.

Foundational Requirements for Equipment Deductions

Any equipment a business intends to deduct, whether new or used, must meet specific criteria established by the IRS. The equipment’s primary purpose must be for business use, not personal use. If an asset serves both business and personal functions, only the portion attributed to business activity qualifies for a deduction. For instance, a vehicle used both for deliveries and family trips would only have its business mileage deductible.

Another requirement is that the equipment must be “placed in service” during the tax year for which the deduction is claimed. This term signifies that the equipment is ready and available for its intended use in the business, even if it has not been actively used yet. For example, a new machine delivered to a factory and installed in December is considered placed in service for that year, even if production begins in January. Furthermore, the equipment must have a determinable useful life and be expected to last more than one year, distinguishing it from inventory or goods held for sale. Finally, the business must own the equipment to claim deductions, generally excluding leased property.

Primary Methods for Deducting Equipment

Businesses have several primary methods to deduct the cost of equipment, including used assets, which can lead to substantial tax savings. These methods allow businesses to recover the cost of an asset over time or, in some cases, immediately. The choice of method often depends on the asset’s cost, the business’s income, and overall tax strategy.

The Section 179 deduction allows businesses to expense the full purchase price of qualifying property, including used equipment, in the year it is placed in service. For 2024, the maximum Section 179 deduction is $1,220,000, and for 2025, it increases to $1,250,000. This deduction begins to phase out once the total cost of Section 179 property placed in service exceeds $3,050,000 for 2024 and $3,130,000 for 2025. The deduction cannot create a net loss for the business; it is limited to the business’s taxable income. For used equipment, it must be “new to the taxpayer,” meaning the current business cannot have previously owned or used the property.

Bonus depreciation allows an additional first-year deduction for qualifying property. This provision also applies to used equipment acquired after September 27, 2017. The percentage of the deduction was 80% in 2023, 60% in 2024, and will be 40% in 2025, continuing to decrease in subsequent years. This deduction is taken after any Section 179 deduction and before regular depreciation, and it can be claimed even if it creates a net operating loss for the business.

For any remaining basis not expensed through Section 179 or bonus depreciation, or if these methods are not chosen, businesses use the Modified Accelerated Cost Recovery System (MACRS) for depreciation. MACRS spreads the cost of tangible property over its useful life, known as its recovery period. Assets are assigned to specific class lives, such as 5-year property for computers and vehicles, or 7-year property for office furniture. MACRS applies equally to used equipment and uses accelerated methods like the 200% declining balance method for most personal property, switching to the straight-line method later in the asset’s life. Specific conventions, such as the half-year convention, assume property is placed in service in the middle of the year, or the mid-quarter convention if a significant portion of assets are placed in service in the last three months of the tax year.

These deduction methods can be used in combination, with Section 179 applied first, followed by bonus depreciation, and then MACRS for any remaining unrecovered cost. The cost of an asset cannot be deducted multiple times. Each method serves to reduce the asset’s basis, and the combined deductions cannot exceed the total cost of the equipment.

Essential Information for Claiming Deductions

Before claiming any equipment deductions, business owners need to gather and understand specific pieces of information related to the asset. Accurately determining the cost basis of the used equipment is paramount, as this figure forms the foundation for all deduction calculations. The cost basis includes the purchase price of the equipment plus any additional costs incurred to acquire, transport, and make the asset ready for its intended use, such as shipping fees, installation charges, or sales tax. This comprehensive cost basis is then reduced by any deductions taken over the asset’s life.

The date the equipment was placed in service is another crucial detail. This date dictates the tax year in which the deduction can first be claimed and is essential for establishing the depreciation schedule. Correctly identifying the asset type and its corresponding class life is also necessary for MACRS depreciation, as different types of equipment have varying recovery periods. For example, general office equipment typically falls into a 7-year class life, while certain vehicles might be 5-year property.

Furthermore, if the equipment is used for both business and personal purposes, precisely determining the business use percentage is vital. Only the portion of the asset’s cost attributable to business use is deductible.

Maintaining Proper Records

Maintaining thorough and organized records is a fundamental aspect of substantiating equipment deductions for tax purposes. These records are critical for demonstrating compliance with tax laws in case of an IRS inquiry or audit. Essential documents to retain include purchase invoices, bills of sale, and receipts for all related costs such as shipping, installation, and setup fees. Proof of payment, such as canceled checks or bank statements, should also be kept.

Documentation supporting the business use percentage, especially for assets with mixed personal and business use, is also important. This could include mileage logs for vehicles or usage logs for other equipment. The IRS requires that businesses keep records that clearly show income and expenses, and all supporting documents.

The IRS recommends keeping tax records for at least three years from the date the tax return was filed or its due date, whichever is later. However, for property records, it is advisable to keep them until the period of limitations expires for the tax year in which the asset is sold or disposed of, which can extend beyond the standard three years. Records can be kept in either physical or digital format, but digital systems must provide a complete and accurate record that is accessible and reproducible.