By Gabriela Mandiuc, CPA and Bennett Allison, CPA
Maximizing deductions is an essential part of income tax planning. In recent years, 100 percent bonus depreciation has proved to be one of the most effective ways to generate serious deductions through the purchase of fixed assets. Here are a few details related to this valuable deduction:
Under the 2017 Tax Cuts and Jobs Act (TCJA), 100 percent bonus depreciation is available for qualified property purchases placed in service after September 27, 2017. This means that fixed assets purchases such as furniture, fixtures, equipment, certain building interior improvements (also known as qualified improvement property), and land improvements can qualify for immediate expensing.
To illustrate the power of bonus depreciation, take the following example. You place $100,000 of building interior improvements in service during 2022 that qualify for bonus depreciation. The entire $100,000 is deducted on your 2022 tax return with a potential federal tax savings of up to $40,800. If these improvements were not properly identified and instead misclassified as 39-year building property, the resulting deduction would only be $2,564 per year!
Unless Congress makes changes, the 100 percent deduction will only be available through December 31, 2022. After this date, this deduction is phased out as follows:
While it may seem simple on the surface, bonus depreciation requires careful and thoughtful consideration. Below are a few questions you might consider addressing:
- If you are planning major purchases, should you aim to accelerate those purchases to take advantage of the 100 percent deduction in 2022?
- Do your building improvements even qualify for bonus depreciation?
- If your business is in a loss position currently, should you elect out of bonus depreciation to preserve deductions for a future year when your tax rates may be higher?
- Does the rental house or office building I just purchased qualify for bonus depreciation? Hint: It might if you look into cost segregation studies for component assets with shorter lives (or cost segregation calculators for smaller property purchases).
Taxes are complex and the professionals at Sol Schwartz and Associates are here to help implement the best planning approach that also fits your business needs, so please reach out with your questions today. Email Bennett Allison, firstname.lastname@example.org, Gabriela Mandiuc, email@example.com, or contact anyone at Sol Schwartz & Associates at 210.384.8000.