What packaging equipment did you purchase this year? Did those purchases benefit your business by streamlining operations, improving efficiency and throughput, or reducing your Total Cost of Ownership (TCO)?
What about lowering taxes on your machinery expenditures and keeping more money for operational investment and growth?
When you purchase new or used equipment, you have ongoing incentives, such as tax deductions, that can help improve profits. However, you must spread those deductions across the life of your assets. That can mean waiting five, ten, or even 20 years to see those deductions positively impact your cost-cutting efforts.
With the Section 179 tax deduction, the wait is over.
Section 179 (combined with Bonus Depreciation) lets you claim MILLIONS in purchase price deductions immediately for 2023, keeping hundreds of thousands of dollars in your company’s account and out of the hands of the Internal Revenue Service (IRS).
WHAT IS THE SECTION 179 DEDUCTION?
In the simplest terms, the IRS allows businesses to deduct the total purchase price of their equipment or software for that year. For example, for packagers, if you buy or lease qualified machinery and put it into service during the calendar year, under Section 179, you can deduct the total purchase price from your gross income.
HOW DOES THE SECTION 179 TAX DEDUCTION WORK?
In years past, companies would write off their qualified equipment in smaller increments annually through depreciation. For instance, if you bought machinery for a total of $100,000, you could write off (potentially) $10,000 per year over ten years.
While writing off business expenses was beneficial, the process was too long and drawn out for most business owners. As a result, they sought a way to write off their expenses within the same year they made the purchase.
In stepped the United States Government with Section 179 to help them do just that.
Today, under Section 179, businesses can now write off the total price of their qualifying equipment purchase within that current tax year if those assets meet specific criteria (which we discuss below).
Once that criterion is met, taking advantage of Section 179 is as easy as following THREE simple steps:
- Consult your tax advisor to ensure it is the right move for your business
- Arrange new or pre-owned equipment purchasing with your packaging partner
- Put the purchased equipment into service between January 1 and December 31 of that year
WHO QUALIFIES FOR SECTION 179?
If you are a business that purchases, finances, or leases new or pre-owned packaging machinery during the tax year, you qualify for the Section 179 Deduction. However, you must spend less than $4,050,000 in total for 2023.
In 2023, you are allowed to expense $1,160,000 of assets. That amount is then reduced on a dollar-for-dollar basis once you place $2,890,000 worth of qualified assets into service before December 31.
ARE THERE LIMITS TO SECTION 179 TAX INCENTIVES?
In addition to the $1,160,000 write off, and the spending cap limit on equipment ($2,890,000 in 2023), the entire deduction ends after $4,050,000. Moreover, the purchased equipment must be used more than 50% of the time for business purposes.
This percentage is generally not an issue for producers, as packaging equipment is used 100% of the time to fulfill its purpose. However, if there is doubt as to the total amount you are getting from your equipment’s “business use,” simply multiply the cost of your equipment by the approximate business use to arrive at an approximate, eligible monetary tax deduction amount under Section 179.
HOW CAN SECTION 179 HELP ME SAVE MONEY ON PACKAGING EQUIPMENT?
All this legalese and tax provisions are helpful, but everything boils down to one essential question:
“How do I, as a packager, benefit from Section 179?”
The uncomplicated answer – aside from monetary tax breaks, of course – is Section 179 gives you a chance to invest in your company and operations.
A true small and medium-sized business benefit, Section 179 is one of the few government incentives available that provides tax incentives where they are needed the most: growing your business. Section 179 can make a big difference in your bottom line and the amount of taxes you must pay almost immediately. However, it can also dramatically enhance your operations and has positive repercussions for the American economy:
- Eliminates costly wait times for essential equipment purchases
- Upgrades production with more efficient equipment to stay competitive
- Reduces initial equipment acquisition barriers for new businesses
- Creates an initial expense deduction higher than standard depreciation
- Helps to invest savings in facilitating growth in multiple production areas
- Allows immediate profits and healthy working capital for additional investment
- Grants full purchase price deductions before annual loan payments
SECTION 179 VS BONUS DEPRECIATION
Once you’ve exceeded the spending limit mandated by Section 179 ($2,890,000 in 2023), you still have options for tax incentives for equipment larger purchases as well. That incentive is called Bonus Depreciation.
However, when taking advantage of either Section 179 and Bonus Depreciation tax incentives, or both, it is crucial to understand the differences, requirements, and operational parameters to ensure they work best for you:
Maximum Purchase Amount
Section 179 was created to benefit small and medium-sized businesses, placing a cap on equipment spending of $2,890,000 for 2023. Bonus Depreciation offers tax incentives beyond that amount, mandating no spending limit for purchases and allowing for a 100% total deduction percentage for new and used equipment.
Annual Deduction Limit
There is no annual deduction limit for Bonus Depreciation if the purchased equipment is within the same category (e.g., 5-year assets). However, Section 179 has an annual deduction limit for 2023 of $1,160,000.
Profitability & Business Income
Taking advantage of the Section 179 tax incentive requires a company to post a profit for that year. Additionally, the deduction under Section 179 must be less than a company’s annual income.
Bonus Depreciation makes no such distinction and allows you to deduct the purchase price of your equipment even at a loss. Under Bonus Depreciation, you carry forward the loss into future years.
SECTION 179 AND BONUS DEPRECIATION BOTH BENEFIT YOU
The good news is, despite their differences, you can take advantage of BOTH Section 179 and Bonus Depreciation tax incentives in tandem. Section 179 must be applied first, however, and anything over the $1,160,000 limit can be taken as Bonus Depreciation.
Cost of Equipment: $3,000,000
Section 179 Deduction: $1,050,000
Bonus Depreciation Deduction: $1,560,000
Total First Year Deduction: $2,688,000
Cash Savings on Purchase (assuming 21% C-Corp tax bracket): $564,480
Lowered Cost of Equipment (after tax savings): $2,435,520
You can calculate the total savings on your equipment purchase by contacting one of our reps today!
OPENING NEW AVENUES TOWARD FUTURE GROWTH
Section 179 cuts wait times and red tape to facilitate optimal equipment acquisition and new operational growth. Alone, or coupled with Bonus Depreciation, this incentive can help to lower the tax burdens through accelerated depreciation and cut operating costs year over year.
If you’re wondering how these deductions could affect your purchasing or equipment financing strategy, we can help.
As your single-source supplier, the experts at Harpak-ULMA Packaging will work to facilitate a smooth packaging system purchase and aid you in making the most productive, cost-effective decisions for your unique operations as you optimize now and for the future.