As a small business owner, you’re always looking for ways to save money and improve your financial stability, especially with the rise of inflation.
But with the tax laws constantly changing lately, it can be hard to keep up.
What can you do?
You need to take advantage of the many tax breaks and incentives offered by the government.
One incentive that’s getting a lot of talk lately is bonus depreciation.
But what is it and how does it work?
Let’s take a closer look.
What Is Bonus Depreciation?
Bonus depreciation is a special depreciation allowance that allows businesses to deduct a larger portion of the cost of newly acquired assets during the year they’re placed into service…that’s a mouthful!
Simply put, bonus depreciation is a way to speed up the tax write-off for certain capital expenses. It allows businesses to deduct a larger percentage of the cost of qualifying assets in the year they are placed into service.
The current bonus depreciation rate is 100%, which means businesses can deduct the entire cost of certain qualified property.
To qualify for bonus depreciation, the asset must be new and used (if used, must be a new asset to the business – not having owned it before) and have a useful life of 20 years or less. The asset must also be used for business purposes (not for personal use).
The type of property that typically qualifies for bonus depreciation includes things like:
Bonus depreciation can be claimed on both personal property and real property, including buildings and land improvements.
How Does Bonus Depreciation Work?
Let’s say you purchase a new piece of equipment for your business at a cost of $10,000.
If you took a straight line depreciation, you would be able to deduct only $5,000 in the year you placed the equipment in service. With straight-line depreciation, you divide the cost (minus the estimated salvage value at the end of useful life) by the years of life.
However, with bonus depreciation, you would be able to deduct the entire $10,000 in the year you placed it in service.
This can help you save money on your taxes and reinvest those savings back into your business by allowing you to write off a large portion of your expenses during the year they incurred.
However, take note that the current bonus depreciation rate is due to phase out after 2022; going from 100% to 80% in 2023 and less as the years go on, so now is the time to think about making those large purchases.
Bonus depreciation can be a valuable tax break for businesses that are making significant investments in new equipment and property.
By allowing businesses to deduct a larger portion of the costs in the year the asset is placed in service, it can help businesses save money on their taxes and free up cash to reinvest in their business.
If you’re considering acquiring any new assets for your business, be sure to check with an accountant or tax advisor to see if they qualify for bonus depreciation.
Need assistance? Reach out to us today, we’ll be happy to answer any questions you may have.