Can I deduct tools and equipment as a contractor?
Yes, tools and equipment used in your contracting business are deductible. The IRS offers several methods depending on what you bought and how much it cost.
For smaller tools under $2,500, you can expense the full cost in the year you purchased them using the de minimis safe harbor election. This covers most hand tools, power tools, and smaller equipment. Buy a $400 impact driver or a $180 laser level, deduct it that year. No depreciation schedule, no spreading the cost over multiple years.
Larger purchases qualify for Section 179, which lets you deduct the full price in the year you put the equipment into service. This applies to work trucks, trailers, skid steers, and expensive power equipment. The 2024 limit is $1,220,000, far more than most contractors spend in a year. Bonus depreciation offers another option, allowing you to write off 60% immediately in 2024 with the remainder depreciated over time.
Business use percentage matters for anything you also use personally. If your truck is 75% business and 25% personal, you can only deduct 75% of the cost. The IRS pays close attention to vehicle deductions, so keep a mileage log or other records showing how the vehicle gets used. Claiming 100% business use on a truck that sits in your driveway every weekend invites scrutiny.
Documentation protects your deductions. Keep receipts showing what you bought, when you bought it, and what it cost. Note the business purpose. A $2,200 charge at Home Depot could be job materials or personal home improvement. You need records that prove the business connection if questions come up later.
One thing contractors overlook is what happens when you sell or trade in equipment. If you took Section 179 on a trailer and sell it three years later, you may owe taxes on the sale. This recapture rule catches people off guard at tax time. Construction businesses benefit from planning ahead on equipment purchases and disposals rather than figuring it out after the fact.
The rules around depreciation and expensing change frequently. What made sense last year may not be the best approach this year. Nampa tax professionals who work with contractors regularly can help you choose the right method for each purchase and keep documentation organized so deductions hold up if the IRS ever asks questions.
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