Bonus depreciation’s job is to spur economic growth through investment, or reinvestment, in business property within the United States. Whether you’re a manufacturer looking to expand your operations or simply looking to update your equipment, bonus depreciation can help you accelerate tax savings. In addition to accelerating deductions to the current year, taking a bonus depreciation deduction in 2017 instead of 2018 may also save you actual tax dollars.
What is bonus depreciation? It’s a special, one-time deduction available in the year you place in service new qualifying property. The dollar amount of the deduction will be dependent on the percentage allowed under the law in effect for the year you put the asset in service. Currently, the general rule is 50% bonus depreciation will be available for eligible property placed in service in 2017, 40% for property placed in service in 2018 and 30% for property placed in service in 2019.
To illustrate the benefits of bonus depreciation let’s look at an example. In 2017, you buy and place in service an asset with a five-year depreciable life which cost $2,000. Under the bonus depreciation rules, you are allowed to immediately expense $1,000 (50% of the cost of the asset). You would also be allowed to depreciate the remaining $1,000 and take a $200 regular depreciation deduction, for a total 2017 of $1,200. Without the bonus depreciation rules, you would only receive a current deduction of $400. Note that we are not creating deductions by utilizing bonus depreciation, but simply accelerating them.
If we recalculate the above example assuming a placed in service date of 2018 (40% bonus depreciation), you would be able to get a first year deduction of $1,040 ($2,000 x .40 = $800 bonus depreciation; $1,200 x .20 = 240 regular depreciation). You may not think a difference of $160 between the two years is a big deal. However, if we change the cost of the new asset to $500,000, the difference between the two years sky rockets to $40,000!
It’s no secret that the Trump administration and the Republican Congress wish to lower tax rates. What no one knows is when these changes will happen, what they will entail and when they will be effective if tax rates drop in 2018, depending on your tax situation it may make more sense to invest in your operations today and get a bigger tax benefit out of your deduction. More simply put, by accelerating deductions to 2017 you can reduce taxable income in a year with potentially higher tax rates than the next. This could translate into real cash savings year over year.
Like every tax law, the bonus depreciation rules can be tricky. For example, not all capital assets will qualify for bonus depreciation and you need to pay close attention to when an asset is placed in service. If you’re planning any large capital expenditures in the near future please give us a call to ensure the proper planning is taken to maximize your investment.