A business owner researching how to use bonus depreciation for her business.
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Tax credits are important for businesses aiming to maximize profitability and sustainable growth. Bonus depreciation is a key tax provision that has gained considerable attention. It enables companies to immediately deduct a large portion of the cost of eligible assets, such as machinery, equipment, and certain software, in the year they are placed in service. This accelerated depreciation schedule allows companies to reduce their taxable income in the short term, promoting long-term investments in new equipment and technology.
A financial advisor can help your business use tax credits to minimize taxable income and plan for future growth and investments.
Using bonus depreciation can be highly beneficial for businesses, as it allows them to immediately deduct a significant portion of the cost of new assets in the first year of use. This accelerates cost recovery, improves cash flow, and can provide more capital for reinvestment or other business needs. For example, the Tax Cuts and Jobs Act of 2017 allowed businesses to deduct 100% of the cost of eligible assets purchased and used between September 27, 2017, and January 1, 2023. This accelerated depreciation helps businesses recover their investment costs faster, improving cash flow and freeing up capital for additional investments.
While bonus depreciation can offer significant tax benefits, businesses should consider their long-term financial goals before applying it. Accelerating depreciation results in smaller deductions in future years, which may not be beneficial for companies anticipating higher profits. Additionally, not all assets qualify for bonus depreciation, so it’s important to consult with a financial advisor or tax consultant for compliance and to optimize tax strategies.
Bonus depreciation is gradually being phased out, impacting how businesses plan their capital expenditures. The phaseout schedule was established by the Tax Cuts and Jobs Act of 2017, which initially allowed for 100% bonus depreciation. This provision enabled businesses to immediately write off the full cost of eligible property, boosting cash flow and encouraging investment.
The bonus depreciation phaseout schedule is structured to gradually reduce the percentage of the deduction over several years. Starting in 2023, the bonus depreciation rate will decrease by 20% each year until it is completely phased out by 2027. Here is a detailed look at the phaseout schedule:
Year
Bonus Depreciation Rate
2023
80%
2024
60%
2025
40%
2026
20%
2027
0%
A business owner researching which assets qualify for bonus depreciation?
Many different assets qualify for bonus depreciation, making this tax benefit accessible to businesses in various industries. Eligible assets include machinery, equipment, computers, appliances, and furniture, as well as certain improvements to nonresidential buildings like roofs, HVAC systems, and security systems. To comply with IRS rules and maximize tax savings, companies should keep precise records and consult with a financial advisor specializing in small businesses.
It’s important for businesses to understand which assets qualify for bonus depreciation to effectively optimize their tax planning. By investing in eligible assets, companies can significantly reduce their taxable income, allowing for more funds to be allocated to investments or operational needs. This tax incentive not only promotes business growth but also economic expansion by encouraging the purchase of new assets.
Not all assets can qualify for this depreciation. For a clearer picture, here is a list of specific assets that typically do not qualify for bonus depreciation:
Real estate properties, including residential and commercial buildings
Intangible assets such as patents, copyrights, and trademarks
Assets used predominantly outside the United States
Assets acquired from related parties
Assets used by tax-exempt organizations or governmental units
These exclusions are in place because bonus depreciation is intended to stimulate domestic investment in tangible, short-lived assets that contribute directly to business operations.
A business owner reviewing the cash flow of her business.
Accelerating depreciation can improve cash flow by allowing businesses to reinvest sooner in growth opportunities. To make use of bonus depreciation, businesses need to identify which assets are eligible, generally tangible property with a recovery period of 20 years or less, such as machinery, equipment and certain building improvements. Although bonus depreciation is set to reduce to 0% by 2027, tax laws could change and extend this benefit. It’s important for businesses to keep up with tax law changes, especially if they depend on these deductions to achieve profitability.
A financial advisor can help grow your small business through financial planning, investment strategies and tax optimization. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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