What is Bonus Depreciation?
As a shop owner, if you invest in certain qualifying assets, the cost, for tax accounting purposes, has traditionally been spread out over the useful life of that asset. However, with Bonus Depreciation, shop owners can deduct a large percentage of the cost the year they acquire these assets, rather than depreciating them over a period of years.
Bonus Depreciation was first introduced in 2002 under the Job Creation and Worker Assistance Act. Congress did this to stimulate the economy after 9/11. It was originally designed to be temporary but in 2003, it was raised from 30% to 50%. Currently, business owners are able to deduct up to 100% of the cost of these qualifying assets. But after January 2023, this deduction will begin to phase out over the next 5 years:
2023 – 80%
2024 – 60%
2025 – 40%
2026 – 20%
2027 – 0%.
What are “certain qualifying assets?”
An eligible asset is considered property (not land or buildings) that can be used or new, and that has a “useful life” of 20 years or less. Prior to the 2017 Tax Cuts and Jobs Act, used property did not qualify for the deduction. Now it does, as long as it is new to the taxpayer. For instance, it would not qualify if you purchased a piece of equipment after leasing it. Nor would it apply to purchases between related entities or to something acquired in a tax-free exchange.
The depreciation deduction is available for eligible property “placed in service” between September 27, 2017 and January 1, 2023.
Do I have to claim it?
No, you are not obligated to claim this deduction. There is also the option of using the Section 179 deduction, however you’ll have to take your income into account. Using Section 179 cannot create a net loss, whereas there is no income limitation for bonus depreciation.
If you are interested in claiming bonus depreciation, talk to your accountant or other trusted financial professional. Instructions for which form to use can be found here: https://www.irs.gov/pub/irs-pdf/i4562.pdf
