Learn how an IT equipment refresh and taking advantage of Section 179 and bonus depreciation in 2017 can help benefit your company’s bottom line.
April is tax month. As I was wrapping up my own personal taxes, I started to think about how the data center may relate. In many cases, some of that old equipment companies may be holding on to could end up actually costing money, rather than contributing positively to their bottom line.
I thought it might be helpful to highlight some ways an equipment refresh can really benefit the company from a financial perspective.
While I am not an accounting professional, it is important to understand some basic concepts to see the relationship between information technology and a company’s bottom line. One such concept is capital expenses versus operating expenses. Capital expenses relate to major purchases of physical goods or services. Purchases of computers, printers, servers, etc. fall into this type of expense category because their useful life is determined to be greater than one year. These expenses are capitalized as assets, rather than fully expensed in the year purchased. When capitalizing assets, the costs of the assets are recovered in the form of depreciation expense each year of the life of the asset (typically 3-5 years). An operating expense, on the other hand, is an expense related to the ongoing operations of a business. These types of expenses are recognized in the year in which they are incurred. Operating expenses include payroll, employee benefits, rent, repairs, depreciation, etc.
How can an equipment refresh affect your bottom line?
A refresh of technology equipment has shown a reduction in a company’s operating expenses. Operational expenses impacted include, but are not limited to: energy, staffing and ongoing facility charges.
Advantages of an equipment refresh are as follows:
Energy cost savings: New equipment is much more efficient. The cost of power and cooling for equipment typically rises as the equipment ages. However, if newer, more energy efficient equipment is purchased to replace the outdated, older equipment, companies can save on a reduction in energy costs. You can learn more by reading Intel’s financial and technical ROI-based approach.
Staffing cost savings: As equipment ages, the costs (time and money) of maintaining and managing this equipment by IT staff increase. With less time spent on maintenance issues, IT staff can focus on optimization and/or staffing needs can be reduced.
Data center cost savings: Due to advances in technology, an organization typically needs less new equipment to replace their outdated equipment. This reduction in actual physical equipment results in less space needed in the data center, and consequently lowers operating costs for companies to maintain the data center facilities.
Intel provides a scenario showing maintenance cost savings associated with decreasing the number of physical servers needed. In their scenario, it was estimated that the average maintenance cost per server is $2,399. If you have 100 servers, that is a maintenance cost of $239,900. However, if you are able to reduce the number of servers to say 21 by replacing legacy servers with newer more advanced servers, then the maintenance costs are reduced to $50,379. This is a savings of $189,521 in maintenance costs!
Security: As equipment ages, software and system updates become less available and/or patches are required to keep the equipment up-and-running. Typically, IT staff becomes disinterested in keeping up with the patches and when not properly administered, systems are then left vulnerable to security attacks.
Many companies do not have an official equipment refresh policy in place or they refresh their computer equipment based only on their depreciation schedules. This creates the false notion that if the equipment is fully depreciated and still being used it’s free. However, based on what we’ve previously discussed, fully depreciated equipment is actually more expensive and can result in being a hindrance to your ability to stay relevant in your industry.
Why buying new equipment in 2017 can be good for tax purposes
There are some actual tax benefits to purchasing equipment during the 2017 calendar year! These benefits include the Section 179 deduction and bonus depreciation.
The Section 179 deduction applies to all new and used equipment purchased and placed into service between January 1, 2017 and December 31, 2017. This means a company making these qualified purchases can take a deduction for the full amount of the asset in the year in which the asset was purchased. So, if you purchase and start using computer equipment worth $100,000 during the 2017 calendar year, generally speaking, you can take a Section 179 deduction of $100,000 for this equipment in 2017. The spending cap on equipment purchases qualifying for the Section 179 deduction is $2,000,000, while the 2017 deduction limit is $500,000. Meaning a company cannot take a Section 179 deduction greater than $500,000 in 2017.
For additional information on this deduction and whether it makes sense for your organization, please see: https://www.irs.gov/publications/p946/ch02.html or http://www.section179.org.
Bonus depreciation expense
Bonus depreciation is also available for 2017. As the name implies, bonus depreciation is additional depreciation expense that can be taken on an asset or assets in certain tax years. For 2017, the bonus depreciation deduction is 50 percent of the purchase price of all new equipment purchased and placed into service between January 1, 2017 and December 31, 2017. This means that if a company purchases and uses a new asset worth $100,000 and this asset does not qualify for the Section 179 deduction, the company can take a bonus depreciation deduction of $50,000 in 2017, as well as regular depreciation expense on the remaining portion of the asset.
The Section 179 deduction and bonus depreciation deduction can both be used in 2017. Once a company has exceeded the $500,000 Section 179 expense limit, reached the $2,000,000 asset spending cap or simply decides not to take the Section 179 deduction in 2017, it can then take bonus depreciation on the remaining assets purchased and placed into service in 2017. It is important to note that the bonus depreciation deduction amount decreases to 40 percent in 2018 and 30 percent in 2019.
For additional information on bonus depreciation and the Section 179 deduction, please refer to http://www.section179.org/.
These two 2017 benefits can provide significant acceleration of depreciation expense for the first year of the useful lives of assets purchased and placed into service in 2017; however, the determination of whether or not to take the Section 179 and bonus depreciation deductions should be made after consulting your tax professional.