What is Bonus Depreciation?

Wouldn’t you love to get a bonus whenever you buy a certain asset for your business? Well, as improbable as it sounds, bonus depreciation does exactly that.

As you know, every time your business acquires a piece of new equipment, depreciation allows you to write off its cost over the number of years it will be used for business operations. But bonus depreciation allows you to deduct a higher percentage of its cost in the same year instead of overtime — provided it qualifies for the terms of this program.

Doesn’t it sound tempting? If you want to know how to maximize the perks of bonus depreciation, below is a quick guide to help you understand.

Who is eligible for Bonus Depreciation?

Bonus depreciation was originally created to help small businesses invest in property and equipment in their first year to fuel the growth of the economy. But now, any business can qualify for this deduction, depending on the type of property you bought and when it was acquired.

Unless you choose not to elect, bonus depreciation is mandatory when a business has a qualifying asset.

How does bonus depreciation work?

To maximize bonus depreciation, you must purchase a qualifying asset or equipment that is used for income-generating activities and has a limited useful life.

Once you receive these, put them into service immediately so that you can write off 100% of their cost in the same year. If you delay using your property within a tax year, you will have to wait for the next tax year to claim your bonus depreciation, where your property may already have depreciated in value.

To claim your bonus depreciation, fill out Form 4562 indicating your assets, and file it with your business tax return.

What qualifies for bonus depreciation?

Before you close the deal on a certain property you have been eyeing, ensure that it qualifies for one or more of the following criteria:

  • Assets with a maximum useful life of 20 years or less. Land and buildings are excluded as they can be used for more than 20 years.
  • Qualified improvement property that enhances the interior of a non-residential real property (or commercial building).
  • Listed assets that are used at least 50% of the time for personal and business use, ie cameras or vehicles.
  • Qualifying film, television, or live theater productions.

Keep in mind that there may be different bonus depreciation limits for vehicles depending on their type and size. This is to prevent business owners from claiming large tax deductions for luxury cars or vehicles for personal use.

The only exception is if your vehicle’s gross vehicle weight (GVW) exceeds 6,000 pounds and is used for business purposes more than 50% of the time, only then can you claim 100% of its cost.

Bonus Depreciation Phase-out

Due to the Tax Cuts and Jobs Act (TCJA) of 2017, businesses are able to write off 100% of the cost of qualified new properties and 50% of the cost of used properties. But for the next 4 years, it is gradually reduced by 20% for each year, applicable to both new and used business properties. Then the rate of tax deduction for the following years will be:

  • Tax Year 2023: Bonus depreciation rate is 80%
  • Tax Year 2024: Bonus depreciation rate is 60%
  • Tax Year 2025: Bonus depreciation rate is 40%
  • Tax Year 2026: Bonus depreciation rate is 20%
  • Tax year 2027 and later: The bonus depreciation rate is 0%

Bonus depreciation was created as a short-term solution to encourage small businesses to invest in properties and assets. Although this phase-out is considered permanent, it may be reinstated in future legislation.

Can You Elect With Bonus Depreciation?

As beneficial as bonus depreciation can be for your business, you still have the option of choosing it for a variety of reasons, including whether you want a more stable tax return or your accountant advises against it.

If you choose to opt-out, all you need to do is attach a statement on your business tax return. But note that you have to opt out for each of your assets separately. The election will apply to all of your property that is placed in service within the same tax year and will be considered nonqualified.

If you decide to void the election, you will receive a letter ruling because you will need the consent of the Commissioner of the Internal Revenue Service (IRS). Although there is an automatic extension of 6 months from the due date of your business tax return where you can file an amended tax return to cancel your election from the bonus depreciation on your assets.

Have an accounting question?

If you have further questions or are seeking legal advice about maximizing bonus depreciation for your business, don’t hesitate to reach out to Lear & Pannepacker.

They have a team of professional accountants and advisors who can assist you with any financial and tax planning challenges you may have. So to connect with an accountant contact their team now

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