Your company needs to add to its fleet. Maybe replace some aging equipment. Or purchase some equipment to put a crane in a location that allows you to better meet the growing needs of a key customer.
In today’s marketplace, which is still reverberating from the impact of the Covid-19 pandemic, with its disruptive impacts on supply chains worldwide, you might be weighing whether to purchase new or purchased used?
As you weigh this challenge, you’re probably considering a number of factors. Of these, don’t overlook two key year-end tax incentives, which may be the tipping point between whether to buy new or used.
Section 179 – Expensing
Section 179 of the Internal Revenue Code can be a useful deduction tool for taxpayers, such as businesses, to save on the cost of equipment purchases. Section 179 is an expense election a business can elect for purchases of new or used equipment that allows for an immediate expense deduction.
Taking the cost of the equipment as an expense allows a business an immediate break on their tax burden whereas capitalizing the asset reduces taxable income proportionally over the life of the asset. Section 179 allows business to treat up to a maximum $1,160,000 of the cost of qualifying equipment as an expense for property placed in service for 2023.
However, the $1,160,000 expense maximum is reduced dollar-for-dollar by the cost of qualifying equipment placed in service during the taxable year that exceeds $2,890,000 (limitation amount for 2023).
To claim Section 179, the equipment or property purchased must be placed in service for business use during the taxable year. The equipment must be used more than 50% of the time for business purposes to qualify for the deduction.
Section 168(k) – Bonus Depreciation
The bonus depreciation of Section 168(k) is another opportunity for a business to claim an immediate deduction on property purchased and placed in service during the tax year.
Bonus deprecation has no limitations and allows for businesses to generate Net Operating Losses whereas Section 179 expense cannot exceed the taxable income for the year.
Any remainder of unused Section 179 expense may be carried forward to the following year that the taxpayer has taxable income. In 2023, a business may choose to elect bonus depreciation at the rate of 80% of the cost of an asset. The current phase down rate schedule is 60% in 2024, 40% in 2025, and 20% in 2026.
Note it is possible to use both bonus depreciation and Section 179 expense election.
There are various state limitations with respect to both bonus depreciation and Section 179 expense.
So, with those two options, what’s the best choice for your business when it comes to purchasing new or used crane equipment. Well, the answer is, “it depends.” Here are four scenarios to consider.
Example 1 (Section 179)
Suppose a business purchases a used crane from Maxim Crane Works through its Maxim Marketplace for $100,000 and it was the only fixed asset purchase for the business during 2023. And, let’s assume the taxable income for the business was $200,000 for the year.
Section 179 permits the business to treat up to $1,160,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. Since the crane purchase was $100,000, the maximum amount that can be expensed is $100,000. Also, since the business’ taxable income was more than $100,000, the entire crane purchase can be expensed immediately for the year.
Bottom Line: Let’s assume the business has an effective tax rate of 20%; the immediate tax savings from the Section 179 expense is $20,000. The lowered cost of the crane purchase would be $80,000 after tax considerations (20% of the purchase price of the crane was paid/subsidized through tax savings).
Example 2 (Section 179 Carryover)
A business purchases a new crane for $3,290,000 during the 2023 calendar year. The customer’s taxable income before any Section 179 expense was $300,000.
Section 179 would permit this business to treat up to $1,160,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure.
However, the $1,160,000 maximum is reduced dollar for dollar by the cost of qualifying property placed in service during the taxable year that exceeds $2,890,000.
Here, the maximum amount that can be expensed is $1,160,000 – ($3,290,000 − $2,890,000) = $760,000 for 2023. However, this amount is further limited as a deduction for 2023 to customer’s taxable income of $300,000 before the Section 179 expense deduction. The remainder ($760,000 – $300,000 = $460,000) that is not currently deductible because of the taxable income limitation, can be carried over and will be deductible subject to the taxable income limitation in 2024.
Bottom Line: Again, assuming the business has an effective rate of 20%, the tax savings from Section 179 is $60,000 for 2023.
Example 3 (Section 168(k) Bonus Depreciation)
A business purchases a used crane from Maxim Crane Works through the Maxim Marketplace for $100,000. The business has taxable income of $50,000 for the tax year 2023.
The customer wishes to only elect bonus depreciation. The bonus depreciation limit for 2023 is 80% of the cost of the asset, or for this example, $80,000. The remaining $20,000 of unused bonus depreciation would be subject to regular depreciation. For simplicity, suppose the asset will be depreciated using the straight-line method over five years. The straight-line depreciation for 2023 would be $4,000, resulting in a total depreciation deduction of $84,000 for the year. Since there is no limitation regarding taxable income for bonus depreciation, the entire amount of depreciation would be deducted on the return and the customer would have a NOL of $34,000 that can be used to offset future taxable income.
Bottom Line: Assuming a 20% tax rate, the immediate tax savings would be $10,000 for 2023.
Example 4 (Section 179 and Bonus Depreciation)
A business purchases a new crane for $3,000,000 during the 2023 calendar year. The customer has taxable income of $5,000,000 for the year.
The customer wishes to elect both Section 179 and bonus deprecation on the newly purchased crane. Note, the IRS requires Section 179 expense to be calculated before bonus depreciation. The maximum Section 179 expense for 2023 would be $1,050,000 ($1,160,000 – ($3,000,000 – $2,890,000)). The bonus deprecation total would compute to $1,560,000 (($3,000,000 – $1,050,000) * 80%). The customer can then take regular depreciation on the remaining unused portion of not subject to Section 179 and bonus depreciation limitations, or $390,000 for this example ($3,000,000 – $1,050,000 – $1,560,000). For simplicity, the customer chooses straight-line depreciation over five years, resulting in an additional $78,000 of depreciation ($390,000/5). The total 2023 deductions would be $2,688,000.
Bottom Line: Using the 20% effective tax rate, the immediate tax savings would be $537,600. The effective cost of equipment following the savings would be $2,462,400.
Ready to Take Advantage of These Incentives?
Wherever your business is in exploring the purchase of used or new crane equipment, let the experts at Maxim Crane Works help you to better understand the best solution to meet your needs. For quality used crane equipment, contact us through Maxim Marketplace, to learn more now. Visit us at: Marketplace.MaximCrane.com.
This article is to be used for informational purposes only. Buyers should consult with their accounting or tax professionals to determine the best course of action and the application of the rules summarized herein to their specific facts.