The Holiday season is in full swing, a time of giving, thanking and receiving. Working with small business owners so closely, I’ve realized that, many times, the best gift they can give themselves is for their business. Yes, that printer may be higher on the list than a new pair of sunglasses! So, if you’ve been putting off investing in a business purchase, now may be a perfect time and take advantage of bonus depreciation.
What is bonus depreciation?
Bonus depreciation is a tax incentive that allows businesses to deduct up to 100% of the cost of an asset during the first year when it is purchased and placed in service. It is also called the additional first-year depreciation deduction. The Tax Cuts and Jobs Act (TCJA) 2018 increased the percentage allowed for bonus depreciation from 50% to 100% for qualifying assets.
How does Bonus Depreciation work?
Let’s say you purchase and place in service computer equipment and software for $10,000. Your bonus depreciation expense will equal 100% of the cost of the assets, in this case, $10,000. If your company’s tax rate is 21%, it will mean a $2,100 reduction in your business’ tax bill. For pass-through entities, the savings percentage will equal the taxpayers’ marginal tax rate. Individual marginal tax rates range from 10% to 37%.
What types of purchases qualify for bonus depreciation?
Qualified business assets for bonus depreciation are assets with useful lives of 20 years or less. Examples include computer equipment, furniture and fixtures, software, vehicles and even intangible assets such as the cost of a patent. Additionally, the TCJA expanded to include qualified used property, while continuing to exclude land.
Does listed property qualify for bonus depreciation?
For listed property to qualify, the assets must be used at least 50% for business purposes to be able to be eligible. Listed property includes assets used for both personal and business purposes, such as automobiles.
Important dates and additional considerations
The 100% bonus depreciation stays in effect for assets purchased or placed in service on or before January 1, 2023. Since TCJA enhances some tax breaks for business, while reducing others, bonus depreciation might not be right for everyone. Bonus depreciation is something I regularly counsel clients on so that they can maximize tax incentives. Taxpayers can opt-out of the bonus depreciation for any qualifying property.
Tax preparation is an important part of the success of your business. DCC Accounting helps clients navigate to help businesses thrive.