Bonus depreciation is a method of accounting that allows businesses to write off a percentage of the expenses attached to certain assets in the year the asset was serviced. This is done to encourage businesses to invest in new equipment and machinery to advance their quality of service. In prior years, bonus depreciation was limited to 50% of the purchase price. However, as of 2022, there has been a 100% depreciation rate. However, at the end of 2022, depreciation coverage will drop from 100% to 80%, with room for variation. Going into 2023, the depreciation rate is expected to be lowered even more until it eventually goes back to its original rate of 50%. Even though it would take a few years to reach its original rate, it is important to develop strategies to combat shrinking depreciation now!
Current plans for the phasing out of bonus depreciation are that in 2023 as mentioned above will go down to 80%. By 2024, it will be down to 60%, and by 2026, it is expected to be down to 20%. In this post, we will answer some of the most commonly asked questions about bonus depreciation and how to deal with its demise. If you would like financial advice regarding how to receive the best tax breaks and get the most out of your tax return, we recommend speaking with an experienced accountant today.
You can use your bonus depreciation several ways before it ends, especially if you are a small business owner who is looking to save money on taxes. One idea is to make large purchases before this year’s end so you can benefit from a larger depreciation rate while it’s still at 100%. Now is the optimal time to reap the maximum benefits of a large business purchase, especially if you are in need of certain tangible assets. Granted, while everyone’s financial situation is different, and not every business has the financial flexibility and liquidity to make purchases ahead of schedule, it is an idea to consider if it is feasible for you.
Bonus depreciation was created in 2017 to increase small business investments. However, the program was only meant to be short-lived. Since the emergence of COVID-19, the bonus depreciation program has continued for longer than expected in efforts to help out small businesses. Now, it’s time to phase it out, unfortunately.
In terms of alternatives to bonus depreciation, Section 179 allows businesses to deduct expenses of depreciable assets. The good news is that business owners can continue to deduct expenses on purchases such as computer software, machines, and other equipment. Additionally, don’t forget to take advantage of business write-offs! Write-offs lower your taxes and can help you cover unpaid receivables, unpaid loans, and even stolen inventory. Instead of it being filed specifically as bonus depreciation for equipment, it will just be filed as any other type of business expense. Our advice? Don’t underestimate what items can be classified for tax breaks and benefits! You might be surprised by how much money you will get back when you take the time to account for write-offs. We also recommend researching and speaking with a financial advisor about additional ways to save money and maximize your tax return.
At Interactive Accountants, assisting business growth and financial success is our number one priority. We are here to help because the better you do, the better we all do! If you still need convincing to call us, feel free to look at our other blogs regarding the help we offer various businesses and offices. Beyond the information we have presented in this article, we also focus on accounting for law firms, accounting for medical professionals, accounting for eCommerce, accounting for restaurants, and accounting for amazon DSPs. If you are a professional in any field that these tips apply to or are simply curious about a topic in this article, please schedule a free consultation with our owner Matthew Shiebler, CPA who has been practicing accounting for over 25 years. Alternatively, call us at (305) 517-3977 or fill out the form below.