Deduct New Equipment and Replacement Parts When You File Your Taxes
It's that time of year again! Tax season is upon us and businesses across the United States are preparing their finances. Nearly all companies rely on equipment of some kind. Each year, they decide whether to replace existing equipment or repair it. New equipment is terrific, but is it the right decision for your business? With your outdoor gas heaters, AEI Gas Grills, it is essential to manage their lifespan with taxes in mind.
Not a Simple Decision
It is not a simple decision to repair or replace existing equipment. Deciding whether it is worth the money to buy replacement parts for your Sunglo Outdoor Heaters or just swap them for new ones requires analysis.
Factors are going to come into play, including the condition of the units and the price to do the repairs, as well as the length of life. How long have you had these heaters and gas grills? Are they ready to be replaced?
However, it's not just about the state of the equipment; taxes must also be taken into account.
The Case to Repair the Equipment
There is a case to be made to just repair equipment that you already have. Consider repairs made to heaters and gas grills as what is known as a current expense. The IRS will treat the cost as something that you can deduct, in full, in the year that you spent it.
Let's take the example of aging Patio Comfort Heaters you own that require extensive repairs — and you spend $1,000 on each of the heaters, repairing them in the year 2018. When you file your taxes, all of that money spent is a current expense, deducted from your revenue for tax reporting purposes.
A current expense is a significant tax benefit and only applies to the year in which the cost occurred. You cannot carry forward the current expense. Typically, though, a deduction for a current expense will exceed depreciation expenses.
Replacing Heaters or BBQ Grills
The purchase of new equipment for a business is the acquisition of assets in the eyes of the IRS. The investment you make is assumed to be in the interest of helping the business increase income.
When you buy a piece of equipment, such as a new heater or gas grill, it is known as a capital expense. You may not be able to deduct the cost that you spend on a capital expense in full in the year of purchase. Instead, you depreciate it over its lifespan.
The IRS will allow you to use either straight-line or declining balance depreciation to take an expense, based on the remaining calculated value of the asset, on an annual basis.
Let's say you purchase a gas grill in 2018 that costs $5,000. It has an expected lifespan of five years, and you plan on using straight-line depreciation. In the first year, you can take a depreciation expense of $1,000 against the revenue earned. In the subsequent four years, more $1,000 deductions are allowed until the asset's value has been tapped, at which point the deductions will cease.
Section 179 Deductions Alter Opinions
Another factor at play concerning replacing equipment versus repairing is the Section 179 deduction. Rather than claiming a depreciation expense annually on a piece of equipment, you can expense the whole thing in one tax year. The IRS allows businesses to take a single-year depreciation expense that is equal to the value of the capital asset, which, in this case, is the gas grill or heater.
Through the tax year 2017, you can claim up to $500,000. In the 2018 tax year, the annual deduction for Section 179 increased to $1,000,000.
Not all types of assets are eligible, but equipment such as heaters and gas grills certainly qualify.
Determining What Is Best for Business
You need to determine what is best for you and your business. You can enjoy the same type of tax benefit whether you repair or replace your heaters and gas grills. When you fix one of these pieces of equipment, you get that current year expense. You can also use Section 179 under standard depreciation to enjoy the full amount expensed in a given year. Standard straight-line depreciation lets you enjoy the benefit of stretching the expense.
The choice is yours, and working with your tax professional can help you make the best financial decision with taxes in mind.