Deduct New Equipment and Replacement Parts When You File Your Taxes

As the tax season rolls around once again, businesses in the U.S. are gearing up their financial preparations. Most companies depend on some form of equipment, and every year they face the choice between replacing old gear or repairing it. While acquiring new equipment might sound appealing, it’s not always the most prudent decision for your business. Whether you’re dealing with outdoor gas heaters or high-quality gas grills, managing their lifespans while keeping tax implications in mind is crucial.

The Complexity of Repair vs. Replace

Deciding whether to repair or replace existing equipment isn’t straightforward. For instance, considering whether to invest in replacement parts for your Sunglo Outdoor Heaters or simply upgrade to new models involves careful analysis. Factors like the current condition of the equipment, the cost of repairs, and the expected lifespan all come into play. How long have you been using these heaters and grills? Are they nearing the end of their useful life?

However, it’s not just about the physical state of your equipment—taxes also play a significant role in this decision-making process.

Repairing Equipment Offers Immediate Tax Benefits

There are compelling reasons to go with repairs rather than replacements. Expenses incurred on repairs, such as those for heaters and gas grills, are considered current expenses by the IRS. This means the entire cost can be deducted in the year it was spent, providing immediate tax relief.

Take, for example, older Patio Comfort Heaters that need extensive repairs costing $1,000 each in 2018. When filing your taxes, you can deduct the full $1,000 spent on repairs for each heater in that year. Current expenses offer substantial tax advantages and are only applicable in the year they occur. Unlike other deductions, you cannot carry forward current expenses. However, typically, the tax savings from current expenses exceed those from depreciation.

Buying New Equipment

When a business purchases new equipment, the IRS views it as acquiring an asset. This investment is expected to contribute to increasing the business's income.

For instance, buying a new gas grill or heater is categorized as a capital expense. You cannot deduct the full cost of a capital expense in the year of purchase. Instead, you must depreciate it over its useful life.

The IRS allows businesses to use either straight-line or declining balance depreciation methods to spread out the expense over the asset's life. Suppose you buy a gas grill for $5,000 in 2018, with an estimated lifespan of five years, and opt for straight-line depreciation. In the first year, you can claim a $1,000 depreciation deduction against your revenue. Over the next four years, similar deductions are allowed until the asset’s value is fully depreciated.

Section 179 Deductions Add Flexibility

Another consideration when deciding between replacing and repairing equipment is the Section 179 deduction. Instead of depreciating the cost of new equipment annually, you can deduct the entire amount in one year. The IRS permits businesses to write off the full value of qualifying capital assets, like heaters and gas grills, in a single tax year.

In 2017, businesses could claim up to $500,000 under Section 179. By 2018, this limit increased to $1 million.

Not all types of assets qualify, but equipment such as heaters and gas grills certainly do.

Making the Right Choice for Your Business

Ultimately, the decision to repair or replace equipment depends on your specific circumstances. Both options offer significant tax benefits. Repairing equipment provides a current-year expense deduction, while Section 179 or standard depreciation allows you to deduct the full cost in a single year. Straight-line depreciation offers a way to spread out the expense over time.

Consulting with a tax professional can help ensure you make the most financially advantageous decision based on your business needs and tax situation.

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