If you are a small business owner in Minnesota, you may have heard of the bonus depreciation deduction, a tax incentive that allows you to deduct a large percentage of the cost of certain assets and equipment in the year you buy and place them in service. This can be a great way to reduce your taxable income and free up cash flow for your business. However, the bonus depreciation deduction is not permanent, and it is gradually phasing out over the next few years. That means you need to plan ahead and consult with a tax specialist to make the smartest decision for your business.
What is the bonus depreciation deduction?
Bonus depreciation, also known as the special depreciation allowance, is a tax break that allows you to deduct a certain percentage of the cost of qualifying assets and equipment in the year you purchase and place them in service, instead of depreciating them over their useful life. Accelerating depreciation expense can be especially beneficial to small business owners who purchase fixed assets rather than finance them, as it more closely matches the cash expenditure to the deduction received in that year.
Bonus depreciation differs from Section 179 depreciation in that there is no annual maximum limit.
What assets and equipment qualify?
Both new and used assets and equipment can qualify for bonus depreciation. Qualified assets include 20 year or less tangible MACRS property, as well as a few special exceptions for long production period property, noncommercial aircraft, and specified plants meeting more specific requirements.
Beware two types of property that don’t qualify and catch many small business owners by surprise: property placed in service and disposed of in the same year, and property converted from business to personal in the same year.
Who can claim it and how?
Bonus depreciation is actually the default method for qualify property in the year placed in service. Small business owners may opt out by filing an election with their business tax return.
Note: There is an order of operations in depreciation. Section 179 is first, followed by bonus depreciation, and ends with regular depreciation. For more information on depreciation, please refer to IRS publication 946.
What is the phase out timeline?
Assets placed in service between 9/28/17 – 12/31/22 were allowed 100% bonus depreciation. Now in the year 2023 that deduction has dropped to 80%. Subsequent years will drop to 60% (2024), 40% (2025), and 20% (2026).
Working with a tax specialist to maximize its impact
Bonus depreciation can be a valuable tax saving tool for your small business. However, given some of the rules above, and more we didn’t cover, it pays to work with a tax specialist to maximize the benefits while staying out of trouble. For example, a tax specialist may advise you to structure your asset purchases over the next five years to account for the bonus depreciation phase out and section 179 annual limits, or how you purchase vs. finance assets. They may advise you to pay different estimated tax payments based on changes to your income tax projections, or help you consider depreciation add backs on state returns. In addition to strategy, they can help you document, calculate, and file those elections, forms, and returns.
Working with Haworth & Company, Ltd.
If you are looking for reliable and experienced tax specialists to help you with bonus depreciation and other tax issues, look no further than Haworth & Company, Ltd. We are a small business accounting firm in Minnesota that specializes in providing tax, accounting, payroll, and consulting services to small businesses. We have been serving the Minnesota small business community since 1989, and we have the knowledge and expertise to help you with all your tax needs. Contact us today to schedule a free consultation.