Manufacturing Safety Packs a Tax Punch
Manufacturing Safety Packs a 1-2 Tax Punch
Generally, safety materials — including additional cleaning and disinfectant supplies purchased during the pandemic — are currently deductible as ordinary and necessary business expenses.
Other major improvements to make your facilities safer — such as installing security cameras, toe boards, or anti-slip flooring — must generally be capitalized and depreciated over time. Fortunately, there are two significant depreciation-related tax breaks for you to consider taking advantage of:
- 100% first-year bonus depreciation deductions. For qualifying assets placed in service in 2021, business taxpayers can deduct 100% of the cost in the first year. The 100% immediate write-off is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets. The bonus depreciation program can potentially create or increase a net operating loss (NOL) for the year.
- Section 179 deductions. For tax years beginning in 2021, a business taxpayer can potentially write off up to $1.05 million of the cost of qualifying new and used assets under the Sec. 179 deduction. Under a phaseout rule, the maximum $1.05 million Sec. 179 deduction for tax years beginning in 2021 is reduced dollar-for-dollar by the excess of Sec. 179 deduction-eligible asset additions over $2.62 million.
However, the allowable deduction for a tax year can’t exceed the taxpayer’s aggregate net business taxable income from all sources calculated before any Sec. 179 deductions. That means Sec. 179 deductions can’t create or increase a federal income tax NOL. Deductions that would create or increase an NOL are disallowed and carried forward to the following tax year.
Bonus depreciation and Sec. 179 deductions aren’t mutually exclusive and can be combined. It’s usually considered a tax-smart move to claim these tax breaks. Consult with your Brady Ware tax advisor to determine what’s best for your situation.