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Bonus depreciation enables a business to more rapidly recoup the costs of depreciable property by taking additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Acts (TCJA), a new law introduced in December, amplifies bonus depreciation.
In some instances, your business might save more tax in the long run by not adopting this claim, though generally, it is beneficial. That being said, claiming bonus depreciation on your 2017 tax return may be particularly helpful now.
Pre- and post-TCJA
Bonus depreciation was 50% before TCJA. Property that met the requirements included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.
Thanks to the TCJA, bonus depreciation increases to 100% in some cases. For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. What’s more, the 100% deduction applies not only to new but also used qualifying property.
Bear in mind that under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. For instance, real estate businesses and auto dealerships may be excluded, depending on the individual circumstances.
A good tax strategy or not?
Typically, if you’re eligible for bonus depreciation (and you anticipate being in the same or a lower tax bracket in future years), taking this break is likely a good tax strategy. It will defer tax, which usually is beneficial. However, you must also factor in any applicable Section 179 expensing.
On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, it might be in your favor to do without bonus depreciation for now. You will end up paying more tax this year, but you will also secure more substantial depreciation deductions for future years. Save these property deductions for when they may be more powerful since deductions save more tax when you’re paying a higher tax rate.
What to do with your 2017 return
2017 might be a particularly good year to take bonus appreciation. With higher tax rates comes the higher tax-saving power of deductions. Beginning in 2018 the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21%. It also lowers individual rates for most people beginning in 2018 through 2025, benefitting owners of pass-through entities such as S corporations, partnerships and (generally) most limited liability companies.
If your rate will be lower in 2018, there’s a higher likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.
If you need more information before deciding whether or not to take bonus depreciation on your 2017 return and/or you have other questions regarding depreciation-related breaks (such as Sec. 179 expensing), please give us a call at 949-860-9902 or click here to contact us.