Deduct New Equipment and Replacement Parts When You File Your Taxes

As another tax season approaches, businesses across the U.S. are evaluating their equipment needs. Whether to repair or replace existing gear is often a tough call, especially when it comes to essential items like outdoor gas heaters and barbecue grills. Managing the lifecycle of your equipment through proper tax planning can make a big difference.

Weighing Repair vs. Replacement

Deciding whether to invest in replacement parts or new equipment isn’t always straightforward. For instance, if your Sunglo Outdoor Heaters are showing signs of wear, should you shell out money for repairs or simply upgrade to newer models? This decision depends on several factors, including the age and condition of the equipment, the cost of repairs, and how much longer the current unit might last.

While the physical state of your equipment is important, so too is the tax angle. Tax considerations can significantly impact your financial strategy.

Repair Expenses as Current Expenses

When you opt to repair existing equipment, you're dealing with what the IRS refers to as a "current expense." These costs can be fully deducted in the year they occur. For example, if you spend $1,000 each on extensive repairs for your aging Patio Comfort Heaters in 2018, you can claim the full amount as a current expense when filing your taxes.

This immediate deduction offers a substantial tax advantage, but it's important to note that you cannot carry forward these expenses. Generally, the tax savings from current expenses tend to surpass those from depreciation.

Buying New Equipment

When you purchase new equipment, it’s considered a capital expense by the IRS. This means the cost is treated as an investment aimed at boosting future revenue. Unlike current expenses, capital expenses aren’t fully deductible in the year of purchase. Instead, you’ll typically spread the cost via depreciation over the equipment’s useful life.

The IRS permits two main methods of depreciation: straight-line or declining balance. Under straight-line depreciation, you divide the cost of the asset evenly over its useful life. Let’s say you buy a gas grill in 2018 for $5,000, with a five-year lifespan. Using straight-line depreciation, you’d be able to deduct $1,000 per year for the next five years until the asset's value is fully depreciated.

Section 179 Deduction: A Game Changer

One notable exception to regular depreciation rules is the Section 179 deduction. Instead of spreading the cost of new equipment over multiple years, you can deduct the entire amount in the year of purchase. The IRS allows businesses to write off up to $1 million in qualifying equipment purchases during the 2018 tax year.

Equipment such as heaters and grills are generally eligible for this deduction. However, there are limitations, so it’s crucial to consult with a tax advisor before making any major purchases.

Making the Right Choice for Your Business

Ultimately, the decision between repairing or replacing equipment hinges on your business’s unique circumstances. Both options offer potential tax benefits. Repair costs can be claimed as current expenses in the same year, while Section 179 deductions enable you to deduct the full cost upfront. Alternatively, standard depreciation spreads out the expense over time, providing a more gradual financial impact.

It’s wise to work closely with your tax professional to evaluate which approach aligns best with your business goals and financial situation.