Take advantage of every tax bonus with this corporate financing tip

Being a great entrepreneur means being aware of and executing the best strategies to put your business in the best position to succeed. Whether you are starting a new business or expanding on your current operation, being aware of every opportunity for financing and growth before you begin will save you a headache in the long run.

There are multiple ways to get the best bang for your business dollar. And if you are a new or expanding business and aren’t taking advantage of bonus depreciation, you’re likely spending much more on overhead than you should.

But what is bonus depreciation and how can it help you save on business expenses?

Depreciation and Bonus Depreciation

To understand bonus depreciation and the tax benefits it could provide your business, it’s essential to have a basic understanding of traditional depreciation.

Depreciation is a tax provision that allows a business to write off an asset or expense over the full lifecycle use of a product. For example, if you purchase a new facility that costs $50,000 and you estimate that you’ll use that facility for the next ten years, depreciation would allow you to write off $5,000 a year over that ten-year period.

Depreciating your assets allows your business to start generating revenue while expensing a percentage of the cost for each year the asset is in use. Depreciation was created to help cut initial business costs and facilitate new business growth. 

Bonus depreciation takes it a step further.

Through the use of bonus depreciation, a business is able to write off more of the cost of an asset in the first year of purchase or acquisition in hopes to create more spending and tax-deductible income in the immediate future. So instead of writing off that new facility for $5,000 over a ten-year period, you can now write off 100% of the cost upfront.

The new bonus depreciation rules only apply to property purchased or acquired between September 27, 2017, and January 1, 2023, under the current Tax Cuts and Jobs Act of 2017. However, the percentage of bonus depreciation you will be able to claim on new and acquired properties will decrease 20% over the next five years unless the law is changed.

Bonus depreciation can also be applied to other qualified purchases such as machinery, software, and new or acquired vehicles.

Why Bonus Depreciation is Important

Bonus Depreciation is an important tax provision designed to help stimulate the economy. By allowing businesses to front their production costs, they are able to get into products sooner and begin buying and selling goods to the benefit of the market.

Through the use of bonus depreciation, an asset that your business uses over the next three years can get the same tax deduction as something you use over the next three days.

Depreciation on new business property is also mandatory if you purchase depreciable property. So if you’re purchasing property that qualifies for bonus depreciation, it could help you save both time and money to write off newly acquired assets upfront.

Difference Between Bonus Depreciation and Section 179

Bonus Depreciation and Section 179 are similar tax services designed to help businesses cut first-year spending costs by allowing them to write-off costly assets upfront. However, there are a few key differences:

Section 179 is capped by the IRS and is limited to the amount of taxable income your business obtains in a year. Bonus Depreciation has no annual limit and can exceed the amount of income your business makes. Section 179 also covers real estate renovations, such as new roofing and remodeling.

However, since Bonus depreciation is still at 100% until 2023, it will generally be a better option for your business.

Rules and Limitations for Depreciation and Expensing 

Under the Tax Cuts and Jobs Act of 2017:

“A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.”

In addition to raising the percentage of real estate being able to be claimed from 50% to 100% in the first year, the new law added qualified film, television, and live theatrical productions as qualified property that may be eligible for a 100 percent bonus depreciation. This provision only applies to property acquired and placed in service after Sept. 27, 2017.