TAX SEASON 2022
Find out if you qualify for Section 179 or bonus depreciation benefits
It may seem early to start thinking about your 2022 tax filings, but with the end of the year fast approaching, time is running out for purchasing equipment that could qualify for Section 179 or bonus depreciation tax benefits. Below, we break down Section 179 and bonus depreciation and what they both look like for 2022.
Section 179 is one of the best tax tools for small business owners. With this deduction, you can deduct the full price of qualifying purchased or financed equipment, vehicles, and software during the tax year. For the 2022 tax year, equipment must be installed and put into service between Jan. 1, 2022, and Dec. 31, 2022, to qualify.
To ensure Section 179 benefits small and mid-sized businesses, the deduction phases out on a dollar-by-dollar basis after eligible purchases reach $2,700,000, with a total cap of $1,080,000 that can be written off. The deduction goes away once businesses spend more than $3,780,000 on eligible purchases. Though Section 179 is a permanent fixture in the Internal Revenue Code (reported through IRS Form 4562), each year the caps are adjusted for inflation.
Another key part to Section 179 is that businesses can pick and choose which assets to deduct, giving this deduction a little more flexibility than bonus depreciation. Though it’s possible to get to zero taxable income with Section 179, the deduction can’t be used to put you in a taxable loss. An important caveat with Section 179 is the equipment, vehicles, and software has to be used more than 50% of the time for business purposes.
Bonus depreciation allows business owners to deduct 100% of qualifying purchased or financed equipment in the first year it is put into service. However, unlike Section 179, bonus depreciation is not a permanent part of the tax code.
In 2022, bonus depreciation is offered at 100%. Unless new legislation is passed, bonus depreciations will begin to phase out starting in 2023. As of now, bonus depreciation will drop to:
» 80% in 2023
» 60% in 2024
» 40% in 2025
» 20% in 2026
» 0% in 2027
While Section 179 allows business owners to pick and choose which assets to deduct, bonus depreciation is automatic and all or nothing. However, business owners can elect out of classes with bonus depreciation. If you have five-year property, seven-year property, and 15-year property, you could elect out of all the properties in one of those classes.
Another difference between Section 179 and bonus depreciation is that bonus depreciation can take you into a taxable loss that can be carried forward or, for a limited time, potentially carried back up to five years. Bonus depreciation also doesn’t require more than 50% business use like Section 179.
It’s important to talk to your tax professionals to ensure compliance when trying to use the Section 179 or bonus depreciation benefits. If you have equipment or vehicles to purchase before the end of the year, it’s important to get your orders in as soon as possible to ensure you take delivery and put equipment into service before Dec. 31, 2022.
United Leasing & Finance is a customer-focused and growth-oriented leasing and finance company committed to providing custom financing solutions to businesses across the U.S. and Canada. For almost 60 years, United has partnered with clients to achieve mutual success from small businesses to Fortune 100 companies.
*The information contained here is for informational purposes only and not to provide tax, legal, or accounting advice. United Leasing & Finance assumes no obligation to inform readers of changes in tax laws or other changes that could affect the information here. You should always consult your tax professional before making any financial or tax decisions. The information here is not intended for and cannot be used for purposes of avoiding tax penalties that may be imposed on any taxpayer.