Tax Tips

Maximizing Tax Benefits: A Strategic Approach to Bonus Depreciation

Josh Yelen, CPA
February 28, 2024
5 min read

Tax rules are like shifting sands. Every business out there is on a constant hunt — looking for ways to smartly manage their finances and reduce their tax liabilities. One approach they've been using? Bonus depreciation. But this tax perk is gradually being phased out. In this blog post, we're diving into the world of bonus depreciation — what it is, how it's phased-out, and how your business can still make the most of their tax benefits.

Understanding Bonus Depreciation
Bonus depreciation is a tax benefit that enables businesses to deduct a significant portion of the cost of eligible assets from their taxable income in the year of acquisition.  President Trump enacted the bonus depreciation tax provision as a component of the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for companies to purchase capital expenditures (CapEx) in order to stimulate the economy. 

The Phase-Out Process
As the saying goes, all good things come to an end, and bonus depreciation is no exception. The original legislation stated a gradual decrease in the bonus percentage over a few years. For instance, the bonus depreciation percentage would decrease from 100% to 80% for property acquired after 2022. With this phase-out, businesses need to reconsider their capital expenditure (capex) strategies.

Strategic Considerations
If businesses want to lower their net income and pay fewer taxes, they need to act strategically, particularly as the bonus depreciation opportunity diminishes. 

Here are some key considerations:

Accelerate CapEx Plans:
To make the most of bonus depreciation before it decreases, businesses should consider accelerating their capital expenditure plans. Investing in qualifying assets now allows them to maximize the deduction and realize immediate tax benefits.

Evaluate Timing of Purchases:
Careful timing of asset acquisitions is essential. Assessing the timing of purchases in relation to the phase-out schedule ensures that businesses capture the highest bonus depreciation percentage available.

Consider Alternative Depreciation Methods:
Businesses can use alternative depreciation methods for their internal financial reporting, despite the IRS mandating the use of MACRS for tax purposes. By assessing different approaches, companies can choose the most advantageous method for their specific circumstances, understanding how it affects cash flow and tax obligations.

Engage with Tax Professionals:
Tax rules are tricky and always changing.  And, as the option for bonus depreciation starts to fade away, it’s a good time for businesses to review their capital expenditure strategies. 

This blog post gives you a starting point, but you’ll want to get personalized tax advice that can make a big difference. They can guide you through the changes and help you make choices that are good for your business now and down the road.

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