Bonus Depreciation: What Is It and How Can You Use It?

If you're a business owner, then you know that taxes are a major consideration when it comes to running your business. And if you're looking for ways to save on business taxes, then bonus depreciation may be the tax break for you! In this blog post, we will explain what bonus depreciation is and how business owners can use it to their advantage.

Want the Cliff-Notes?

• Bonus depreciation is a business tax break that allows business owners to immediately deduct the cost of certain qualifying property on their taxes.
• Qualifying property for bonus depreciation includes things like new equipment, vehicles, and buildings.
• Business owners can use bonus depreciation to save on business taxes by taking advantage of this tax break.

What is Bonus Depreciation?

Bonus depreciation is a business tax savings opportunity that allows business owners to immediately deduct a portion or all of the cost of certain property, such as equipment, during the year it is placed in service. This can lead to significant tax savings for business owners, especially in the first year of ownership.

What Property Qualifies for Bonus Depreciation?

Most business equipment and machinery will qualify for bonus depreciation, such as:

• Property that has a useful life of 20 years or less - including vehicles, equipment, furniture and fixtures, and machinery. (Note: this does not include land or buildings)
• Qualified Improvement Property - Includes any improvements made to the interior of "nonresidential real property" (i.e. a commercial building). The improvement must be made after the building is open for business.
• Computer Software
• Some listed property - such as vehicles and cameras that are used for business at least 50% of the time.

For any of the above property to qualify for bonus depreciation this year, it must be purchased through the business and placed in service during the current tax year. As an example, if you purchase a piece of equipment in December of 2021, but don't install it or start using it until January 2022, the bonus depreciation would apply for the 2022 tax year, not 2021.

How do I claim the bonus deprecation?

To write off up to 100% of the cost of any qualifying property, you will need to fill out the IRS Form 4562, which will be filed alongside your business tax return.

Frequently Asked Questions

1. Do I have to take bonus deprecation?
   • No, the IRS does not require you to take bonus depreciation on any assets, instead, you would just use MACRS depreciation to depreciate the asset over its useful life.
2. Is bonus deprecation the same as Section 179?
   • No - Section 179 and Bonus Depreciation are not the same, but they are often confused. Section 179 allows businesses to immediately deduct the cost of certain property, up to the limit of their taxable profit.
   • For example, if your business has $5,000 of taxable income before taking the Section 179 deduction and you purchase a $15,000 business vehicle, your deduction is limited to $5,000 (your taxable profit) for the current year and the remainder of the deduction is carried forward to future years.
   • Unlike Section 179, Bonus Depreciation is not limited by the taxable income. Under the same example as above, if you purchase the business vehicle and it qualifies for bonus depreciation, your business can deduct the entire $15,000 in the current year. This would reduce your taxable income to $0 and then take bonus depreciation of the remaining $10,000.
3. Can I claim bonus depreciation on used assets?
   • To be eligible for bonus depreciation, the used property must meet the following criteria:
     • The property must have been acquired by purchase (i.e. not inherited or gifted)
     • The original use of the property must have commenced with the taxpayer
     • The used property must not have been previously used by the taxpayer
     • In addition, the used asset must be "new to you." This means that it cannot have been used by anyone else prior to your business acquiring it.
     • For example, if you purchase a used car from an individual, it would not qualify for bonus depreciation because it does not meet the "new to you" requirement. However, if you purchase a used car from a dealership, it would qualify because the dealership is considered the first user.

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