With qualifying warehouse racking systems, companies can optimize their storage investments while reducing their tax burden. Section 179 can significantly impact your financial strategy and operational efficiency, whether you’re a small enterprise or a large corporation.
Understanding the Section 179 Deduction
The Section 179 deduction is a provision in the United States tax code that businesses can use to deduct the entire purchase price of qualifying equipment or software placed into service during the tax year.
For the deduction to apply, you must use the equipment or software more than 50% of the time for business purposes. The deduction has a maximum limit, which is adjusted annually. The 2023 limit is $1,160,000, an $80,000 increase from 2022. The deduction cannot exceed your business’ taxable income.
Eligible assets include tangible personal property such as machinery, computers, vehicles and office furniture. Buildings and land improvements do not qualify.
It’s crucial to stay updated on tax laws and consult a tax professional to determine if you qualify for and can use the Section 179 deduction. Keeping meticulous records of your purchases and their business use is essential for substantiating your claims.
What Is First-Year Bonus Depreciation for Warehouse Shelving?
First-year bonus depreciation or bonus depreciation is a tax incentive that allows businesses to deduct a substantial portion of the cost of qualifying assets in the year they are placed into service. For every following year, portions of the remaining cost are deductible until depreciation ends.
As of December 31, 2022, only purchases made during 2022 are 100% deductible during their first year. For property purchased and used after 2022 and before January 1, 2027, the depreciation bonus will be reduced by 20 points annually until the 2027 phase-out. Here is what the phase-out will look like:
- 100% in 2022
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
- 0% in 2027
By taking advantage of bonus depreciation, companies can reinvest the saved funds into their operations, expansion or further investments, fostering economic growth and development. Your warehouse shelving is eligible for bonus depreciation, allowing you to use those funds to grow your business.
What Is the Difference Between Section 179 and Bonus Depreciation?
Section 179 and bonus depreciation are tax provisions that offer businesses opportunities to reduce their tax liability by expensing certain asset purposes. While they serve similar purposes, they have distinct differences in their application, restrictions and deduction percentages.
Section 179 allows businesses to deduct the full cost of qualifying assets up to a specified limit in the year they are placed into service. You cannot deduct more than your business’s taxable income with the Section 179 deduction. Section 179 applies to tangible personal property and specific improvements to non-residential real property.
Bonus depreciation allows you to deduct a percentage of the cost of qualified assets, regardless of their taxable income. Unlike Section 179, bonus depreciation is not limited by an annual cap. This provision applies to a broader range of assets, including tangible personal property, qualified improvement property and even used property that meets acquisition requirements.
To maximize tax benefits, businesses can strategically combine both provisions. In the year a qualifying asset is placed into service, a company can use bonus depreciation to deduct a portion of the asset’s cost immediately. If the asset’s cost exceeds the annual limit set by Section 179, the business can then use Section 179 to further deduct the remaining cost up to the annual cap. This dual approach optimizes the immediate tax benefit while still capitalizing on the higher deduction limits of Section 179 for certain assets.
Both provisions have restrictions. For example, Section 179 applies to assets used more than 50% for business purposes, while bonus depreciation has no usage requirement. Understanding the specifics of each provision and its implications on business finances requires staying informed and working with professionals to develop a strategy that maximizes your tax benefits.
How to Claim Section 179 Deductions
To claim Section 179 deductions, follow these steps:
- Ensure the asset qualifies — it should be tangible personal property or qualifying software used more than 50% of the time.
- Purchase and put the asset into service within the tax year. Keep detailed records of the purchase date, cost and usage.
- When filing taxes, complete IRS form 4562, “Depreciation and Amortization.” Enter the necessary information about the asset, including its description, cost and percentage used for the business.
- Calculate your deduction limit based on the annual cap. You can deduct the entire cost if the total cost doesn’t exceed your business’s taxable income.
Additionally, it is recommended to work with a tax professional to ensure your dedication claim is accurate and gives you the best possible tax outcome.
Using Bonus Depreciation for Racking Systems
As the first-year bonus depreciation phase-out continues, businesses can still use this tax incentive effectively. Focus on investing in qualified assets, such as warehouse racking equipment and equipment layout optimization, that significantly impact your business operations.
Strategically time your purchases to align with high deduction percentages wherever possible. Splitting purchases across multiple years might help maximize deductions if the asset’s cost is substantial. Additionally, consider accelerating asset purchases that align with your business growth plans during periods of higher bonus depreciation rates. Because the depreciation bonus will decrease yearly according to the phase-out, you will maximize deductions the sooner you purchase qualifying equipment for your business.
Take Advantage of Bonus Depreciation and Section 179 Deduction for Warehouse Racking Systems
With bonus depreciation phasing out and rates declining yearly, you should capitalize on substantial tax savings with cutting-edge industrial racking systems from Ross Technologies. Our premium racking solutions enhance your operational efficiency and enable you to maximize your tax benefits. Invest wisely in your business’s growth while minimizing your tax liability.
Elevate your storage capabilities and financial advantage with Ross Technologies’ Dexco® specialized rack systems — you’ll get lasting, advanced rack systems that fit your operational needs and allow you to take full advantage of bonus depreciation during the phase-out. Contact us today to get started with your advanced racking solution.