As a tax planning strategy, particularly towards the end of the year, a common question from clients is: “What can I buy to decrease my tax liability?” Many consider purchasing vehicles or making down payments on properties or building facilities. However, it’s important to note that there are limits. For example, buying real estate, including land and building, doesn’t usually offer immediate tax deductions. In fact, down payments on property in and of itself don’t qualify for immediate deductions.

The main category of assets eligible for immediate depreciation (sometimes called ‘bonus depreciation’) includes equipment that can be described as losing value upon purchase and is also not permanently affixed to a building or property. This category encompasses a wide variety of assets, from computers to tractors, dehumidifiers, trimming machines, and even essential building equipment like appliances.

For vehicles, to qualify for bonus depreciation or 179 deductions, they must have a demonstrable and primary business use. Purchasing cars for tax write-offs is often risky if they are not used exclusively for business. For instance, vehicles must be used over 5% of the time for business purposes to be eligible. If this percentage drops, the IRS may require you to recapture formerly deducted depreciation. If business use is less than 50%, consider opting for taking a mileage deduction (currently at $0.65 per mile), which is safer. For business owners, reimbursing oneself for mileage from the business for the use of a personal vehicle is recommended. This reimbursement is non-taxable and counts as a business expense. Remember that these business miles must be meticulously recorded for the deduction to be substantiated.  

Land, on the other hand, is not depreciable. It generally appreciates in value, and the IRS doesn’t allow depreciation as it’s seen as a cash-for-property exchange without actual value loss. Residential rental properties can be depreciated over 27.5 years and commercial buildings over 39 years, but these are long-term deductions and don’t offer much immediate tax relief.

Remember, specific equipment, such as above-ground irrigation systems, that aren’t permanently attached to the property can also qualify for bonus depreciation. Investing in equipment can be a smart tax strategy, especially if these are items you plan to purchase regardless.

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