When it comes to bonus depreciation, there are a lot of investors who have questions about how it affects business taxes. Here, we’ll try to provide some answers to those questions and help you understand how this deduction can impact your tax bill. Read on for a general overview of bonus depreciation and its uses.
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This content is informational and not meant to be tax advice. Please consult your tax advisor for advice that is specific to you.
Bonus depreciation is allowed under the Internal Revenue Code (IRC) in the year that qualifying property is in service and temporarily enhances the allowance to 100% of the value of assets acquired. It runs on a schedule after purchases of assets from September 27, 2017, and before January 1, 2023.
The bonus allowed will drop by 20% annually beginning in 2023. The schedule runs like this: 2023 bonus depreciation is at 80%. 2024 at 60%. 2025 at 40% and finally at 20% in 2026 until it reaches zero in 2027.
Here are two sample computations of how bonus depreciation impacts taxes:
Example 1 – If you purchased $20,000 worth of equipment, your tax bracket is 21%. You may deduct the entire $20,000 cost the first year you use the equipment, thanks to 100% bonus depreciation. Deduction of $20,000 x 21% = $4,200. Instead of waiting ten years to fully benefit from the standard depreciation deduction, you get extra money right away.
Example 2 – You invested $100,000 in a multifamily property that gives you $12,000 in cash flow this 2022. You can have a $22,400 tax savings; how?
Your tax bracket is 40%, and your bonus depreciation is $38,000, then you had a $26,000 loss on paper and can be used against your W2 income. Your returns is $22,400.00, using this formula: 40% tax bracket X $26k loss.
To claim bonus depreciation, use IRS Form 4562 and file it with your tax return. Investors must take it in the first year of use of an asset with a 20 year useful life or less.
Bonus depreciation can be a valuable tool to help reduce your tax bill, but it’s essential to understand the rules and qualifications before claiming this deduction. Having an expert guide in taxes should give you a good overview and how to claim it on your taxes. Please consult with your tax professional for the most comprehensive explanation for your specific situation.
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