Tips & Tricks
Plan New Equipment Investments to Maximize Your Tax Deductions
When you're ready to add a new machine to your shop, an abrasive waterjet can expand your cutting capabilities and reduce your need to outsource processes. Along with the flexibility that an abrasive waterjet adds to your workflow, it also offers you a tax break. But phased depreciation means that you can't obtain the full deductible value of your investment immediately – unless you take advantage of special tax incentives designed to help manufacturers.
Before these incentives became available, manufacturers had one basic option for capturing the value of equipment as a tax deduction: phased depreciation, which requires you to deduct part of the price of the equipment annually over multiple years. This approach reflects the value you continue to derive from using the machine tool throughout the years you depreciate it. Unfortunately, it also delays your ability to gain the full deduction for what you bought.
That changed in the United States when the Internal Revenue Service introduced Section 179 of the IRS code, which allows for single-year deductibility of the purchased or financed cost of eligible equipment, and all OMAX abrasive waterjets fall under the price ceiling for this tax incentive. As the IRS says, "Section 179 of the U.S. internal revenue code is an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time."
Whether you're investing in machine tools to start a new shop or ramping up to get ahead, Section 179 is designed to help you grow your business by making the entire purchase deductible at once, without depreciation over several years. For 2021, you can deduct up to $1,050,000 on property with a value of up to $2,620,000. In addition to the Section 179 deduction, you also may qualify to deduct 100% of the purchase prices as bonus depreciation during the first year you own and use equipment that is new to your business.
Every country's tax code is different, of course. In Canada, the capital cost allowance (CCA) requires depreciation of equipment costs over a period of years. The depreciation class, rate and period depend on your business structure and the type of equipment you purchase. In Europe, write-offs for equipment average 84.2% of purchase prices, which is greater than the capital allowances for intangibles and for industrial buildings. Most deductions through depreciation do not consider how inflation dilutes the value of an asset over time, although some countries adjust capital allowances to reduce this negative impact.
Many of the world's leading nations belong to the Organization for Economic Co-operation and Development. Among these nations, depreciation allowances average 85.2% of capital cost. Only Chile, Estonia and Latvia allow for a weighted allowance that enables businesses to capture 100% of the full purchase value of machinery through depreciation, and tax codes vary substantially from nation to nation even within the EU. For more information about the comparisons among OECD-nation tax codes, read the Tax Foundation's consideration of capital cost recovery.
Some of the special incentives now available are designed to offset the impact of the COVID-19 pandemic, and may be available only for a limited number of tax years. Before you decide how to approach incentives, deductions and depreciation, consult with your accountant to determine the best course of action for you and your business in light of the tax codes that apply to your nation.