As the owner of a business, it is critical to be aware of federal income tax rules as they pertain to depreciation. When you have eligible assets, you can use first-year depreciation write-offs in the current tax year to your benefit. While this may not always be the right thing to do, there are opportunities here for you to take advantage of and enjoy in the short and long-term.
The 100% First-Year Depreciation Bonus
There is something called the 100% first-year bonus depreciation that you need to be aware of. When you have an asset, whether it is new or used, that you put into service, it could qualify for this depreciation bonus.
The asset must go into service between September 28, 2017, and December 31, 2022. There are certain asset types, where the deadline to put them into service and take advantage of the depreciation is December 31, 2023.
Section 179 Deductions Still Present
There is also the Section 179 deduction. This allows a business owner to write-off over $1 million in new and used assets that qualify. One of the rules with the Section 179 deduction is that the deduction cannot be above the net business taxable income from all sources before the deduction gets put into place. It is not allowed to create a net operating loss for the business.
What Assets Qualify for These Deductions?
You may be wondering what types of assets will qualify for the deductions that we mentioned above. There is a widespread list of qualifying assets that you can put into service to qualify for the tax break. The first set of assets includes things such as machinery, computers, appliances, furniture, equipment, and more.
When you put these into service, that will take these assets and place them into the period in which they can be fully depreciated or written off on tax returns.
Deciding to Write Off Now or Wait for Later
There is an art to what you end up doing with your assets and the depreciation approach you take. There is a chance that the current tax year rates will be lower than you will see in the future. If you plan to be in business over the long-term, stretching out the depreciation expense could reduce your taxable income in the future. If there is a higher tax rate in the future, this could in theory net you a higher financial benefit.
It is all about understanding where your company is now and what write-offs and bonus depreciation make sense today, and what makes sense in the future. If you are a new business with minimal income, using Section 179 is not going to generate a loss, so you may not actually be getting the benefit of the full write-off. In these cases, that bonus depreciation could be better spread.
There is a lot to think about when considering 100% first-year bonus depreciation and Section 179 write-offs. Both of these can help you net financial gains as a business and it is critical to be intelligent about how you approach each. It's important to work with your tax professional to be sure you are using the write-offs appropriately for your personal situation as a business owner. Chandler & Knowles is here to assist you in any way we can, so feel free to contact our team to get started.