One of our credos at Office Furniture Warehouse is that commercial furniture is more than a commodity – it’s a process. However, thinking like your CFO will help make more efficient use of your capital expense on furniture, fixtures and equipment. Staying responsive to adjustments concerning deductions, caps and depreciation can significantly impact your bottom line. So, here’s a quick guide to the how 2018 tax reforms affect buying office furniture.
How Office Furniture Affects Your Bottom Line
Office furniture is not classified as an expense. Office furniture is recorded as an asset. To be specific, it’s a tangible fixed asset. Also called PP&E (property, plant & equipment), this is a classification of physical items used to generate revenue for a company during a period of longer than one year. That period during which it contributes to company operations is referred to as the “useful life” – typically seven years for furniture. Over the course of that useful life, the expense of putting that furniture to use is recorded in a process called depreciation. By the end of those seven years, the purchase value of your furniture has been recorded as “depreciation expense”, which is deductible from gross income.
Simply put, the asset begins to lose value once placed in service. Depreciation prevents you from paying taxes on the value lost.
Before 2018 tax reforms, office furniture was typically depreciated using a 5- or 7-year schedule. This means it used to take between five and seven years to write-off the full value of your investment (deducting less than 15% in the first year). Changes to Section 179 of the IRS tax code enacted in 2018 increased the deduction limit, spending cap and percentage of allowable bonus depreciation.
What’s Section 179?
Section 179 of the IRS tax code includes guidelines for depreciating property, as well as special allowances known as “bonus depreciation”. This legislation allows businesses to deduct the full purchase price of qualifying assets acquired during the tax year (with some limitations). The incentive is based on the idea that, provided with tax relief, small businesses will have the opportunity to invest in themselves and grow at a faster rate.
So, What’s Changed About Buying Office Furniture?
Prior to 2018, Section 179 allowed businesses to deduct up to $500,000 of qualifying investments from gross income. The total investment threshold was $2,000,000, meaning that the deduction decreases as the investment rises above the threshold. New legislation enacted in 2018:
increased the deduction limit to $1,000,000
increased limit on capital purchases to $2,500,000
increased bonus depreciation to 100%
expanded bonus depreciation to include pre-owned purchases
This means businesses are able to deduct 100% the purchase amount of new or used office furniture up to $1,000,000. It also means the deduction won’t suffer a penalty if the total investment remains under $2,500,000. As long as the purchase and placed in service dates are between September 27, 2017 and January 1, 2023, businesses will be able to realize immediate income tax deductions for these investments.
Thanks for Reading!
Buying office furniture is a process to carefully consider beyond the up-front investment.
While we’re not CPA’s (and you should consult one before making tax decisions), we hope this helps you make a more informed decision on your next project! Want to keep up with all the helpful info, project idea starters and networking events from Office Furniture Warehouse?