With the huge - and somewhat unexpected - e-commerce boom, many in the material handling and distribution center warehouse space are finding a sudden need to beef up their fleet. With today’s e-commerce expectations - rapid order fulfillment and rapid shipping - you probably have trucks loading and unloading at your warehouse dock constantly.
In order to stay ahead of the traffic and your competition, you need forklifts, reach trucks, order pickers, pallet jacks, utility vehicles and more. If you are making better use of your space by upgrading your warehouse to include narrow aisle solutions, there is specialized equipment for that, too. When contemplating buying expensive equipment, it’s best to research all possible ways to ease the squeeze on your bottom line, including Sec. 179 of the U.S. federal tax code.
Believe it or not, Section 179 of the U.S. federal tax code has been in place since 1958. Because Section 179 includes expensing allowances that tend to disqualify larger businesses, many people feel the code is targeted at medium- to smaller-size interests. What started out as a temporary boost for qualifying businesses, Section 179, designed to increase investment in smaller businesses, while decreasing their tax burden and simplifying their accounting, is now a permanent part of the U.S. tax code.
The Ins and Outs of Section 179
In a nutshell, Section 179 allows qualifying businesses to expense up to $1,050,000 in 2021 of the total cost of qualified new or used depreciable assets it buys or leases and places into service during 2021. For our purposes, we’re going to say that qualified new and used purchases include material handling and DC warehouse equipment and systems, but many items are eligible, including furniture, computer software and more.
Here’s the breakdown of how Section 179 works:
- Without Section 179, businesses typically write off new purchases a little bit each year as depreciation, until the “useful life” of the asset ends
- With Section 179, qualifying businesses can write off the entire price of eligible items in the year of purchase (as long as the purchased item is put into service during that year)
So, let’s get to three reasons why Section 179 could benefit you as you boost your material handling and DC warehouse fleet. Later, we’ll talk about limitations and other concerns.
- Save money on your taxes: With the full-purchase price deduction available immediately, you’ll reduce your current-year tax burden.
- Save money on equipment cost: With the first year write-off, plus bonus depreciation, you’ll significantly reduce the cost of your purchase upfront.
- Free up money for other expenses: With reduced taxes, plus decreased purchase price, you’ll have money left over to use for other important purchases.
There are other reasons people choose to take advantage of Section 179, but these are the most meaningful for most mid- to smaller-sized material handling and DC warehouse applications.
What About Bonus Depreciation?
Bonus depreciation is another important adjustment meant to help businesses alleviate their tax burden, while encouraging engagement in the marketplace. Similar to Section 179, bonus depreciation allows qualifying businesses to write-off a large percentage of depreciation on an eligible purchase up front, instead of over time.
The difference between bonus depreciation and Section 179 is how it is calculated, with bonus depreciation being in percentage and Section 179 in a dollar amount. You can use bonus depreciation in conjunction with Section 179, but Section 179 will need to be applied first and bonus depreciation applied to the remaining amount.
Bonus depreciation for 2021 is 100 percent, while Section 179 is set at $1,050,000 for 2021. See the example graphic for a description of what that looks like.
Limits, Qualifications & Guidelines
As we mentioned, there are limits and qualifications associated with Section 179. Most businesses will find it advantageous to apply Section 179 to their taxes this year, if for no other reason than to quickly get up to speed with an ever-growing e-commerce landscape. In order to use Section 179, your business must spend less than $3,670,000 in 2021. Other guidelines include:
- Once your business spends $2,620,000 in qualified assets, you’ll start phasing out Section 179’s $1,050,000 dollar for dollar until you reach $3,670,000
- To qualify, purchases must be placed into service before Dec. 31, 2021 and must be used for your business 50 percent of the time (keep this in mind if you plan to buy equipment that your operators will need to train to use)
- Your use of Section 179 cannot cause a net loss for your business income
- Section 179 can be used for new and/or used equipment, as well as for purchased and/or leased equipment
As you are aware, training is necessary for some equipment in the material handling and DC warehouse universe. As we approach the holiday season (Thanksgiving and December’s big dates), be sure and keep in mind that an important requirement for Section 179 is that the equipment be in use before Dec. 31, 2021.
This means that you should take into account days off for your employees when planning purchase dates and training on any new equipment. Weather is another factor as we move into winter. You’ll want to leave yourself plenty of time to get everyone trained and get that equipment into service.
As you can see, there are benefits to putting this piece of the tax code to work for you - especially in these times when boosting your pace and productivity may have a direct impact on how your business handles e-commerce. As always, you’ll want to consult your tax professional before making any major decisions about large purchases under Section 179.
At Darr Equipment Co, our professional and knowledgeable staff can help you find the best solution for maximizing your equipment budget for your specific application. Contact us today to find out more about our new and used purchase and lease solutions.