When a business entity, especially a smaller one, makes a major purchase of a depreciable asset—like restaurant equipment, new computer system, delivery truck, office furniture—it can be a big hit on their wallet, or saddle them with burdensome debt.
In 2017, Congress passed the Tax Cuts and Jobs Act, creating a tax incentive that allows businesses to deduct a larger depreciation expense on capital assets purchased, affording them more immediate tax relief.
They called it Bonus Depreciation.
In this article, we define just what bonus depreciation is, what assets qualify for it, how much additional depreciation you can write off, how it differs from Section 179 depreciation, and potential drawbacks to taking it.
To encourage more investment in capital assets, bonus depreciation allows businesses to deduct a larger percentage of the cost of eligible business property in the year it is placed in service. The faster write-off is in addition to the asset’s regular depreciation.
This welcome provision is a boon to many small businesses, since the accelerated depreciation schedule immediately reduces their tax liability and makes it easier to acquire the assets that can help grow their business.
Bonus depreciation typically applies to tangible property, including vehicles, equipment, machinery, furniture, and certain types of real property improvements.
Only depreciable assets are eligible and must have a useful life of 20 years or less.
This includes what the IRS defines as “listed property,” or property purchased for both personal and business use, provided more than 50% is used for business purposes (measured in time, mileage, or other relevant metric). Among these assets are:
Finance or capital leases transfer ownership of the underlying asset from the lessor to the lessee, who is entitled to various tax benefits, including bonus depreciation.
An operating lease, however, permits the use of an asset without transferring ownership rights. Thus, the lessee cannot claim bonus depreciation, but the lessor can.
Other assets that aren’t eligible for the bonus write-off include residential rental property, assets that don’t lose their value over time, and those you are not currently using to create income—for example, land, art collectibles, coins, and memorabilia.
Since its enactment in 2017, when bonus depreciation amounted to 100% of a qualifying asset’s cost, the additional percentage you can deduct is being slowly phasing out.
For the 2024 tax year, you can take an extra 60% depreciation expense; in 2025 that number will decline to 40%; in 2026 it goes down to 20%, and for 2027 and beyond, 0%.
| 💰To benefit from the law before it expires, and enjoy a sizable reduction in your taxes, make those capital purchases sooner than later. |
Bonus depreciation has no annual cap in actual dollars on the amount of your deduction. Because there’s no limit, you can take an operating loss that can carry forward in subsequent years to offset future income.
What’s the difference? Which is better?
As discussed, bonus depreciation can offer small businesses some big tax relief. Yet there are a few caveats you should be aware of:
Bonus depreciation offers attractive financial benefits if you’re trying to expand your small business, would like to make major asset purchases, and don’t want to be hit with high taxes at a time when that money could be put to better use.
But since bonus depreciation will be nonexistent by the tax year 2027, and its write-off percentage is declining each year, the time to take advantage of it is ASAP.
Yes, it can all be complicated and confusing. That’s why here at DiMercurio Advisors we make it our mission to fully master such tax issues to give you the best advice possible on how to proceed.
We invite you to learn more with a complimentary consultation.