If you’re hoping to capture some big write-offs for your company’s 2020 tax return, acquiring new business assets may be the way to go. Recent legislative changes have made deductions for new equipment put into service in 2020 even more enticing, especially in the wake of the Coronavirus pandemic. Use the tips below to learn how to maximize your write-offs.
Use Section 179 Changes to Your Advantage
Section 179 of the tax code allows businesses to deduct the cost of new business assets up to what CPA Practice Advisor terms a “generous limit.” Their article notes that the recent Tax Cuts and Jobs Act (TCJA) doubled the maximum section 179 deduction amount from $500,000 to $1,000,000 for 2020. In 2021, this limit will further increase to $1.5 million. Any costs above $2.59 million will be reduced on a dollar-for-dollar basis. To keep your deductions below the max amount allowed, they cannot exceed the income of your business for 2020.
Take Advantage of the Depreciation Deduction Bonus
In addition, the first year bonus depreciation deduction was raised for all new equipment put into service after September 27, 2017. The limit prior to the TCJA was 50%, but the Act changed it to 100%. The bonus depreciation tax break is expected to phase out in five years unless it is renewed by Congress. Any property that is depreciable under the Modified Accelerated Cost Recovery System (MACRS) that has a recovery period of 20 years or under is eligible. The TCJA also expanded qualifying property to included used assets as well as new.
Use MACRS Write-Offs to Fill the Gaps
If your costs are not covered by Section 179 and the depreciation bonus noted above, you can take advantage of the new MACRS guidelines regarding used property for even more write-offs. Determine the “useful life” of your equipment to figure out how much of your costs you can recover. CPA Practice Advisor warns that when the cost of asset is higher than 40% of revenue, MACRS deductions drop steeply, so that is something to be mindful of when considering your tax strategy.
Even with all of the restrictions that we noted above, tax write-offs for business assets can be a game-changer for this year’s business return. If you take advantage of Section 179, depreciation bonus, and MACRS write-offs, it may even be possible to cover the entire cost for your business in 2020. If you are unsure about what deductions you are eligible for, please contact your tax professional for further assistance.