Bonus depreciation is a tax incentive for taxpayers who incur capital expenditures or spend money on certain depreciable assets. These taxpayers can elect to deduct 100% of the asset's depreciation in the current tax year, although the allowable amount of depreciation is scheduled to decrease each of the next five years. Bonus depreciation allows a higher but less controllable depreciable tax strategy compared to Section 179 deductions.

You may also want to consider bonus depreciation allowances which enables businesses to depreciate qualifying property at an accelerated rate. Instead of taking tax deductions for the cost of an asset over its useful life (or to the extent an asset will be used in the business), bonus depreciation front-loads a larger percentage of the deduction into the tax year the business starts using the asset.

Qualifying property is any asset that has a recovery period of 20 years or less using the IRS-approved modified accelerated cost recovery system (MACRS). This includes assets like machinery, equipment, computers, appliances, furniture, and vehicles. Prior to the Tax Cuts and Jobs Act, only new assets were eligible for bonus depreciation, but the definition has since been expanded to include certain used property as well.

Bonus depreciation may now also be taken on qualified improvement property (QIP). This means that if a business makes certain improvements to the interior of a commercial building, such as any electrical or plumbing upgrades, interior door replacements, drywall replacement, etc., then the business may be able to accelerate depreciation on the total cost of the improvement efforts. Not included in the QIP definition are elevators and escalators, enlargements to the property, or enhancements to the internal structural framework of the building.

The TCJA also widened the scope of bonus depreciation by including ”non-tangible” assets such as qualified films, television, and live theatrical productions that were acquired after September 27, 2017, as qualified property.

Accelerating depreciation deductions can reduce your tax liability, but there are other tax implications of purchasing new business assets beyond bonus depreciation. For example, if you purchase new computer equipment to replace older models, you’ll need to dispose of the old equipment. This could result in a taxable gain or loss when you report the disposition to the IRS. You must consider both the purchase and the sale/disposition of the asset being replaced.

Bonus depreciation is not mandatory, so you may opt to forego the accelerated deduction. Depending on your situation, it may make sense to deduct the cost of the asset over several years using traditional MACRS depreciation, or to leverage bonus depreciation in later years when you have more taxable income to report. Regardless, bonus depreciation can play an important role in multi-year tax planning, contact our team today for an appointment.