While not a new phenomenon, tax payers — specifically business owners — should pay attention to two sections when doing their taxes: section 197 and bonus depreciation. 

Kelly Puryear, certified public accountant and managing partner at TRP Sumner, said these sections are the measures put in place to boost the economy typically when the economy is not doing well. 

“This has been in place for a few years,” Puryear said. “Encouraging equipment purchase is something that Congress does to get manufacturers going and the economy moving.” 

These tax exemptions allow business tax payers to expense in the year they purchase a piece of equipment. 

“You can write off the entire amount of the purchase against your income,” Puryear said. “So if you spend $60,000 for a piece of equipment, then you get a $60,000 deduction in the year that you purchase it.” 

Previously, business taxpayers had to depreciate that asset over a number of years. For example, a five-year depreciation would mean business tax payers would take part of the depreciation in each of the five years that would give them a total deduction of $60,000, Puryear said. 

“But you would get the total deduction over the five-year period and not all at once,” he added. 

The exemption is applicable to any equipment that business taxpayers purchase and not specific to industry with a few stipulations. 

“As long as the asset life designated by the IRS is not more than 15 years, then you can write off the expenditure,” Puryear said. “They're saving immediately on their taxes.” 

Section 179 is what allows business tax payers to write off business equipment and for the year 2021, the cap for this is $1,050,000, according to Michael Mitchell, from Michael D Mitchell CPA in Hope Mills. This tax incentive election has been around for a long time. 

“It gets a little more complicated if you buy too much equipment and vehicles and the number reaches $2.62 million in 2021, then you may not be able to take the deduction,” Mitchell said. “And all these things that we are talking about right now, taxpayers should always check with their individual tax preparer and see how these decisions would affect them on an individual basis as far as decision making because everybody is different.” 

The other type of deduction is the bonus depreciation. According to Mitchell, this tax incentive has been around for almost two decades now since the Bush administration in the early 2000s to help stimulate the economy. 

“Back then it was a smaller percentage, something like 30 percent deduction of equipment you bought to be written off in the first year,” he said. “Normally equipment, furniture and fixtures that sort of things, have to be written off over a five- or seven-year period.” 

What 179 expense and bonus depreciation does for business tax payers is it allows for them to deduct the amount of capital expenditures in the first year if they so choose. 

“Section 179 — it is an election,” Mitchell said. “For bonus depreciation it is automatically calculated. And for bonus depreciation you have to elect out of that. Bonus depreciation can be 100 percent of your expenditure in the year of purchase.” 

In Mitchell’s practice, he said they always check which tax bracket their clients are in first. This is to ensure their clients are given the right tools to make a smart decision on how much equipment or vehicles to write off. 

“Vehicles that weigh more than 6,000 pounds (gross vehicle weight rating), they qualify for both 179 and bonus expenditures expense elections,” Mitchell said. 

Without it being too complicated, Mitchell added that there are a few differences between the Section 179 and the bonus depreciation. 

“The 179 expense is limited to your taxable income and bonus depreciation is not,” he said. “Sometimes taxpayers — they shoot themselves in the foot if they take too much of these expense elections in the first year,” he said. “Also with earned income credit, there are certain caps on that. Less than $40,000 adjusted gross typically you want to make sure you're not wiping out an earned income credit because you're too aggressive with one of these elections or the bonus depreciation.” 

Mitchell highly suggests that business taxpayers do meticulous proactive tax planning with their tax preparer prior large spendings. 

“I can't emphasize enough, with our accounting practice we do a lot of tax planning in the fall through the end of the year examining business to see where our clients are at to help them make these decisions in an intelligent manner,” he said. “It's very difficult to help them after the fact because it's better to be proactive and plan for these expenditures versus telling your accountant about it after the fact that it may be wasted money or too late to do any planning."