Did you know that the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying business assets purchased or financed during the tax year — like equipment and machinery? Here’s everything that you need to know about business assets and bonus depreciation!
What is Bonus Depreciation?
Under the Tax Cuts and Jobs Act of 2017, the IRS tax code now allows “bonus depreciation” up to 100% of the purchase cost of permitted business assets. Before this act was put in place, the code only authorized a deduction up to 50%.
The concept of bonus depreciation is a method of accelerated depreciation, otherwise known as special depreciation allowance. This code is found under Section 168(k).
Businesses may be eligible for a full purchase deduction of the cost of qualified business property after applying Section 179 deductions. These eligible property deductions are for purchases made between September 27, 2017 and January 1, 2023.
After January 1, 2023, the full purchase price deduction will be phased out…
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
What Kind of Business Assets are Eligible for Bonus Depreciation?
In relation to the tax code, eligible business assets need to have 20 years of useful life or less. Some examples are:
- Computer Software
This may also include qualified business improvements made to the interior of commercial buildings or listed property.
Does the Business Asset Need to Be New?
To apply the bonus depreciation, the business assets may be used, but they must be new to the taxpayer. Bonus depreciation is NOT applicable when:
- Buying property after leasing it
- It’s a transaction between related parties
- It’s in context of a like-kind exchange
Is Bonus Depreciation Mandatory? Can I Use a Different Method?
No, bonus depreciation is not mandatory. When deciding if bonus depreciation is for you, you’ll want to consider the timing of when this deduction would be taxed. For instance, an expanding business with a low net income may want to span out those deductions over the asset’s useful life instead.
There are different methods that you can use, such as 179 expansion deduction. These two methods are slightly different and will yield different results.
When Do You Claim the Bonus Depreciation Deduction? How Do I Claim It?
You’ll be able to claim the bonus depreciation deduction during the taxable year in which the asset was placed in service (or when you put it to use). For example, if you buy a piece of heavy equipment in year one, but don’t use it until year two, you’d claim it in year two.
To confirm your bonus deduction, claim it on line 14 of Form 4562 when filing your taxes.
As you’re wrapping up your year and calculating taxes, it’s important to keep your business assets and bonus depreciation in mind!
If you’re interested in acquiring new, used, or rental equipment, please reach out to Rose Equipment at 402-467-5988!
Bonus Depreciation of Business Assets: 7 Hot Questions in 2021, The Langel Firm
For more information, please take a look at this additional resource from the IRS: New Rules and Limitation for Depreciation and Expensing Under the Tax Cuts and Job Act