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A Simple Guide To Heavy Equipment Tax Deductions
Let’s be honest: No one enjoys paying taxes. But if you invested in heavy equipment this year — or plan to in the future — you might be able to take advantage of tax deductions to save money. Here’s an overview of the main deductions to know about.
NOTE: Every business is different, so always work with your professional tax advisor to see what applies to you.
Estimated read time: 6 minutes
Depreciation: Tax Deductions You Can Spread Out or Take Right Away
When you buy heavy equipment like dozers, excavators or loaders, the IRS lets you spread out the cost over its “useful life” — the expected lifespan of the equipment. This approach, called depreciation, lets you write off part of the equipment’s cost each year to reduce your taxable income. Common useful life periods are five, seven or 10 years, depending on the type of equipment. Setting this correctly helps maximize your deductions over time.
Three Ways to Accelerate Your Tax Savings
If you’d prefer more tax deductions sooner, so you can reinvest the savings back into your operation, talk to your tax pro about these “accelerated” depreciation options:
Accelerating Depreciation with Modified Accelerated Cost Recovery System (MACRS) lets you deduct a larger portion of a machine’s cost in the early years and smaller amounts later. It’s a way to reduce your taxable income more quickly after buying expensive equipment.
Under MACRS, heavy equipment typically has a useful life of five or seven years. You apply specific depreciation percentages each year based on your machine’s category. Categories and rates reflect the idea that equipment often loses value faster at the beginning of its life.
Maximizing Tax Savings for Business Equipment Purchases of the IRS tax code allows you to take larger deductions the year you purchase a machine. If you buy qualifying new or used equipment, you can deduct the total price — up to a certain amount — that tax year. (Deduction limits and spending caps may change annually.) For small to medium-sized businesses, this depreciation method can offer significant tax relief.
Exploring Bonus Depreciation for Large Businesses lets you deduct a large percentage of a machine’s purchase price the first year and spread the rest over future years. Both new and used equipment qualify, and they don’t need to be working on a jobsite. A machine in storage is eligible as long as it’s ready to work.
If you run a larger business or make multiple machine purchases in a year, bonus depreciation is worth exploring because you’re not limited by Section 179’s spending cap. Keep in mind that it’s not permanently enshrined in the IRS tax code, and the deduction percentage may change.
Accelerated depreciation has its advantages, but that doesn’t mean it’s the best choice for your business. Standard depreciation, where you spread out tax benefits over several years, may make more sense depending on your financial goals. Always discuss your options with a professional tax advisor.
If you only buy one or two machines annually, there’s a good chance you can stay under Section 179’s dollar limits and write off 100% of your purchases.
Owned vs. Leased Equipment: is the Tax Write-off Different?
When you buy equipment, you can take advantage of depreciation deductions. Leasing equipment is different — instead of depreciation, you can typically deduct your lease payments as a business expense. If you eventually buy the equipment at the end of your lease, you can start using depreciation deductions going forward.
As you’re deciding between buying or leasing, consider how each option might affect your cash flow, tax deductions and overall tax liability:
| Purchasing Heavy Equipment | Leasing Heavy Equipment | |
|---|---|---|
| Cash Flow | Buying equipment generally requires a larger upfront investment — often a significant down payment if you take out an equipment loan — which can put a strain on cash flow. | Leasing equipment generally requires a smaller upfront investment — often just a monthly payment — which can help improve cash flow. |
| Tax Deductions | Accelerated depreciation options may allow you to deduct a big portion (or all) of the equipment cost in the first year. That could lower your taxable income significantly that year. | Lease payments typically are fully deductible as a business expense. That could reduce your taxable income over a period of years, though you don’t get a big upfront deduction. |
| Overall Tax Liability | If your goal is to reduce tax liability quickly, buying equipment and using upfront deductions could provide an immediate, significant tax break. There may be fewer tax benefits in subsequent years, however. | If your goal is to keep tax savings steady year after year, leasing equipment can spread out your deductions over time. The tax benefits may be smaller each year, however. |
It’s also worth exploring the specific tax benefits of buying or leasing used equipment.
Don’t Overlook Potential State and Local Tax Incentives
Although they vary widely by location, state and local tax incentives offer another way to save money on heavy equipment purchases.
- Sales tax exemptions: In certain states, heavy equipment used for a specific purpose (like construction or farming) may be exempt from sales tax, or you may pay a lower rate.
- Investment tax credits: Some states offer incentives to encourage you to invest locally. You might get a credit against your state income tax based on a percentage of a machine’s cost.
- Property tax reductions: Heavy equipment can be subject to local property taxes, but in some areas, those taxes may be reduced or waived for machines used for specific types of work.
- Energy efficiency incentives: In some locations, buying equipment that meets energy-efficiency standards or uses alternative fuels may qualify you for additional tax credits or rebates.
To see what’s available, check state government websites, local economic development offices and industry associations. Then check with your tax pro to determine what you’re eligible for.
Check with your local tax professional on ways you can save on heavy equipment purchases.
Detailed Record-keeping is a Must
To claim any deduction, you must keep detailed records. Your tax advisor needs proof of a machine’s cost, its use and the date it was placed in service to track depreciation accurately. And you’ll want that information close at hand if the IRS or state tax authorities ever question your claims.
Here are a few record-keeping tips:
Predictable Slowdowns:
Seasonal weather conditions can often be anticipated. For example, colder months might cause project delays, while certain times of the year may experience lower demand for construction services.
Unpredictable but Common Challenges:
While some factors are forecastable, others — like economic crashes, political changes and supply chain disruptions — are more difficult to predict but can heavily impact business operations.
What a Company Needs to Survive:
To get through slow periods, companies need to have extra cash saved up. It also helps to expand into other types of work during off-seasons to keep the business going.
If you’ve financed equipment through Cat Financial, set up your free MyCatFinancial account to access all your tax documents. You can also use it to make payments and view contract details.
More Ways We Can Help
The only way to qualify for heavy equipment tax deductions is to acquire heavy equipment. When you’re ready to buy or lease, you can count on Cat Financial to help you find cost-effective solutions for your business. To get started, talk to your local Cat dealer about your financing options or request more information on financing below.
Disclaimer: This article is for informational purposes only and should not be considered tax or legal advice. Because each business is unique and tax laws change regularly, we strongly encourage you to consult a qualified tax advisor to determine how these opportunities might apply to your situation.
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