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Fixed assets such as equipment, machinery, software, computers, and vehicles help small businesses operate efficiently and generate income. In addition, fixed assets present companies with a nice bonus when they file their income taxes. We are referring to bonus depreciation, a tax incentive that allows small businesses to write off a specific percentage of the purchase price of eligible assets and property. If you do not fully understand what bonus depreciation is or how it works, this blog post from Balboa Capital is for you. It has all of the information you need to know about bonus depreciation.
How it all began.
The year was 2002, and the United States rebounded from a slight recession in 2001. To help boost the economy and increase business spending, Congress introduced the Job Creation and Worker Assistance Act, which included a new tax incentive called bonus depreciation. As reported by Forbes, small business owners elected to use it could write off 30% of the cost of certain qualifying assets¹. It was an instant hit with small business owners, and our government took notice and increased the rate to 50% in 2003.
Over the years, the rules and rates have gone through several changes. For example, eligible assets needed to be purchased and placed into business service during specific time frames to be eligible. In addition, the percentage rates were revised when new economic stimulus packages were introduced, such as the Protecting Americans from Tax Hikes (PATH) Act or the Tax Cuts and Jobs Act.
This graph shows you the bonus depreciation rates in 2023 and beyond.
|Scheduled bonus depreciation rate by year|
|Assets placed into service in calendar-year 2023||80%|
|Assets placed into service in calendar-year 2024||60%|
|Assets placed into service in calendar-year 2025||40%|
|Assets placed into service in calendar-year 2026||20%|
How bonus depreciation works.
Bonus depreciation is an accelerated depreciation that lowers your tax burden. Instead of spreading out the purchase price of a qualifying asset over many years, it lets you deduct a certain percentage of the purchase price in the year you buy it and start using it. Bonus depreciation is available for many new and used assets and property with a useful life of two decades or less. This includes machinery, vehicles, equipment, computers, printers, furniture, and off-the-shelf software.
Here is a sample scenario of how bonus depreciation works. A construction company lands a contract to build homes in a new master-planned community. After reviewing the size and scope of the project, the construction company’s CEO decided to purchase $200,000 worth of heavy equipment in 2023, the same year the construction job started. The equipment qualifies because it has a depreciation period of 20 years or less, and it was put into service in the year it was acquired. The first-year rate is 80% in 2023, and, as a result, the construction company’s CEO will be able to deduct $160,000 on their tax return.
Bonus depreciation and Section 179.
Many small business owners confuse bonus depreciation with the Section 179 tax deduction. That is because both of these tax incentives offer similar benefits and can be used together. In a nutshell, bonus depreciation lets you recover the cost of eligible assets or property you buy, while Section 179 allows you to expense the cost.
Bonus depreciation is a good option if your asset purchases exceed the current Section 179 limit. For example, suppose you take Section 179 and bonus depreciation allowances. In that case, the Section 179 deduction must be used first, and the amount surpassing the Section 179 limit can be taken in bonus depreciation.
Section 179 limits and information on the Balboa Capital website are for illustrative purposes only; the Section 179 limits and information provided are subject to change by the IRS. Please visit the IRS website or consult a qualified tax professional for confirmation of the current Section 179 limits and information related to your situation.
Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses Forbes, the Job Creation and Worker Assistance Act, the Protecting Americans from Tax Hikes (PATH) Act, or the Tax Cuts and Jobs Act. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.