How To Maximize Your Depreciation Deduction?

Every year, tax time rolls around in the spring. And leading up to it, you need to think about whether your business needs to buy business equipment and other depreciable assets.  

If you do, you might benefit from the Section 179 deduction for business property.  

Section 179 expensing offers a tax windfall for landlords, allowing them to claim immediate deductions for qualified assets instead of taking depreciation deduction over time. 

Furthermore, the Section 179 deduction isn’t the only route to getting tax breaks for qualified assets. Bonus depreciation covers 100% of qualified assets through the end of 2022. 

The Section 179 Deduction 

When a landlord purchased qualifying equipment in the past, they usually wrote it off a little at a time using depreciation. In other words, if you spent $50,000 on a machine, you might write off around $10,000 per year over five years.  

Now, while this is more advantageous than no write-off at all, most landlords would prefer to write off the entire equipment purchase price the year they purchase it. 

And guess what? That’s precisely what Section 179 allows you to do. You can now write off the entire purchase price of qualifying equipment for the current tax year. 

According to the IRS, the Section 179 deduction applies to tangible personal property such as machinery and equipment bought for use in a trade or business and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit. 

The Tax Cuts and Jobs Act changed the definition of qualified real property to refer to qualified improvement property and some improvements like roof, HVAC, and security system enhancements. Revenue Procedure 2019-08 details how taxpayers can decide to treat qualified real property as Section 179 property. 

It’s important to note that there’s a taxable income limit. If your taxable business income is under the dollar limit for that year, the allowable election amount is restricted to that taxable income. However, any amount you can’t deduct right away is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit). 

In addition to significantly increasing the Section 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodgings, such as furniture and appliances. 

Section 179 has made an enormous difference for landlords because many can now purchase equipment they need immediately rather than waiting to save up money over time. And, for most small landlords, the entire cost of qualifying equipment can be a write-off on their 2022 tax return (up to $1,080,000). 

Bonus Depreciation 

Bonus depreciation is a type of accelerated business tax deduction that property owners can claim for qualifying property on their federal tax return.

Prior to the Tax Cuts and Jobs Act, you could only deduct 50% of the cost of qualified new property. Now, with the new tax law regarding depreciation deductions, landlords can deduct 100% of the cost of specific assets in the first year, instead of putting them on their balance sheets and gradually depreciating them over an extended period. This makes bonus depreciation very beneficial as it substantially decreases a landlord’s or company’s tax liability.

So what are the bonus depreciation rules? This tax break applies to qualifying assets put into service between September 28, 2017, and December 31, 2022. The 100% bonus depreciation rate only stays in effect until January 1, 2023. The remaining bonus depreciation percentage cutoffs are as follows:

• 80% if the property is placed in service after December 31, 2022, and before January 1, 2024 
• 60% if the property is placed in service after December 31, 2023, and before January 1, 2025 
• 40% if the property is placed in service after December 31, 2024, and before January 1, 2026. 
• 20% if the property is placed in service after December 31, 2025, and before January 1, 2027 

These bonus depreciation phases are in effect for the next few years, as the deduction is being phased out. The last bonus depreciation phase will be completely phased out by the end of the 2026 tax year, unless extended by Congress.

Bonus depreciation is optional, so you don’t have an obligation to take it. However, you probably want the largest depreciation deduction you can get, so take advantage of this alternative with your qualified property whenever possible to minimize tax liability. Additionally, you can claim bonus depreciation to increase the amount of first-year depreciation available for business vehicles by $8,000. 

Qualifications 

Equipment and other assets qualify for a bonus depreciation deduction if it has a useful life of 20 years and you buy it from someone not related to you. Real estate properties are eligible property for bonus depreciation.

In the past, the law stipulated you could only use bonus depreciation for new assets. The Tax Cuts and Jobs Act modified that rule so you can use bonus depreciation for purchases of new or used equipment beginning in 2018. 

It’s worth mentioning that if the asset is listed property, you need to use it over 50% of the time for it to qualify for bonus depreciation. Listed property includes cars and other personal property. 

How is Bonus Depreciation Different from Section 179? 

Bonus depreciation and section 179 are obviously different. But what exactly separates them? 

• Bonus depreciation isn’t limited to an annual dollar limit. 
• Bonus depreciation doesn’t require the property to be used over 50% of the time for your business unless it is “listed property” like automobiles, cameras, and specific other kinds of personal property. 
• Bonus depreciation isn’t limited to yearly business profit. 

Most of the time, the same asset will qualify for Section 179 expensing and bonus depreciation. In this instance, you choose which method to use, or you can combine bonus depreciation with Section 179 expensing. If you decide to claim Section 179 expensing and bonus depreciation for the same asset, you need to use Section 179 first, then bonus depreciation, and then regular depreciation (if needed). 

Bonus depreciation is applicable for both new and used qualifying assets, which include most categories of tangible depreciable assets, excluding real estate. 

In any instance where both 100% first-year bonus depreciation and Section 179 expensing are allowed for the same asset, it’s typically more beneficial to claim 100% bonus depreciation, because there aren’t restrictions on it. Understanding how bonus depreciation works can help you save during future tax years, until it is completely phased out.

Conclusion 

Section 179 and the bonus depreciation deduction help you recoup as much money as possible for your business. 

Understanding tax rules may take some effort, but these two areas can have a big positive impact on your bottom line.