What is Bonus Depreciation? A Guide for Business

Bonus depreciation is a hot topic in the real estate industry. This guide will break down everything you need to know about it and how it affects your business. This can be a confusing topic, so let’s get started!

What is Bonus Depreciation?

Bonus depreciation is a tax deduction that allows businesses to recover the cost of certain assets faster. Assets that qualify for bonus depreciation include a new or used property with a depreciable life of 20 years or less. The IRS offers 100% bonus depreciation for qualifying assets placed in service during the year. 

The Tax Cuts and Jobs Act, passed in 2017, changed the depreciation schedule for properties and assets acquired after September 27, 2017.

How Does It Work?

Without bonus depreciation, a company’s financial statement may suffer because of a property or asset acquisition, showing lower profits or losses for that year. 

Below are the three qualifications to claim bonus depreciation:

1. Purchase a property for your business that are within the following parameters:

• You’ll own it for more than one year.
• Used in income-generating activities.
• IRS-based determinable useful life.

2. Use the property or asset in business.

3. IRS Form 4562, filed with your business tax return, can deduct up to 100% of the asset’s cost.

Listed property must be used 50% or more for the business to qualify for bonus depreciation. Some of the listed properties could be automobiles or other personal property. Excluded from this deduction are capital improvement equipment, certain intangibles, and property sold in the year of purchase. 

The 2017 Tax Cuts and Jobs Act (expiring on January 01, 2023) changed bonus depreciation rules. Most importantly, it doubled the bonus depreciation deduction for qualified property from 50% to 100%. In the years following January 1, 2023, the deduction will automatically be reduced on the following schedule:

• 2023, bonus depreciation will be 80%. 
• 2024, it will be 60%,
• 2025, 40%. 
• 2026, it will be 20%. 

Look for Congress to change the law in 2026. Pre-September 27, 2017, properties are still subject to the old law. 

Does Bonus Depreciation Apply to a Used Property?

Yes, as long as it meets the following criteria:

• The taxpayer didn’t buy the property from a friend.
• The purchase wasn’t a tax-free transaction
• The taxpayer never used the property before buying it. 

For businesses that purchase various fixed assets, bonus depreciation can be a valuable tax break. Depreciation laws and limits, on the other hand, are constantly changing. 

Before you decide to purchase property, consult with a trusted real estate professional and your tax advisor to ensure you’re making the best decision for your company and make the most out of your investments.

Don’t hesitate to contact us here if we can help you find a commercial real estate investment in the Miami area.

Thanks for visiting!