Bonus Depreciation: The Ultimate Guide for US Small Businesses

Are you looking to reduce your business’s tax bill? Bonus depreciation might be the tool you need. This tax incentive allows businesses to immediately deduct a large portion of the cost of qualifying assets, helping reduce taxable income significantly.

In this guide, we’ll walk you through how bonus depreciation works, which assets qualify, and how to claim it—ensuring you maximize your tax savings.

What is Bonus Depreciation?

Bonus depreciation is a tax incentive that allows businesses to deduct a significant percentage of the cost of qualifying assets in the year they are placed in service. Unlike traditional depreciation, which spreads deductions over multiple years, bonus depreciation enables businesses to accelerate deductions and reduce taxable income quickly. Here’s how it works:

• Immediate Deductions: Instead of spreading deductions out over many years, you can claim a large portion of the cost in the first year the asset is placed in service.
• Reduced Taxable Income: By claiming bonus depreciation, you can lower your taxable income, which may lead to significant tax savings.

How Does Bonus Depreciation Work?

Thanks to the Tax Cuts and Jobs Act (TCJA), businesses can benefit from 100% bonus depreciation on assets purchased and placed in service between 2018 and 2022. After 2022, the percentage of bonus depreciation decreases as follows:

• 100% for assets placed in service from 2018 to 2022
• 80% for assets placed in service in 2023
• 60% for assets placed in service in 2024
• 40% for assets placed in service in 2025
• 20% for assets placed in service in 2026

This gradual decrease means that businesses can still take advantage of substantial deductions, but time is running out to claim 100%.

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Which Assets Qualify for Bonus Depreciation?

To qualify for bonus depreciation, the asset must have a useful life of 20 years or less and must be used for business purposes. Here are some examples of assets that may qualify:

• Machinery and Equipment: Assets used in your business operations or manufacturing.
• Vehicles: Cars, trucks, or other vehicles used for business purposes.
• Software and Computers: Technology and software essential for your business.

The good news? Bonus depreciation applies to both new and used assets, as long as they are “new to you.” This means you can claim deductions on assets that weren’t previously used by your business.

How to Claim Bonus Depreciation

Claiming bonus depreciation is a straightforward process. Here’s how to do it:

1. Identify Eligible Assets: Ensure your business assets meet the criteria for bonus depreciation, such as a useful life of 20 years or less.
2. Track Your Expenses: Keep records of the asset’s cost, purchase date, and its use in your business.
3. File IRS Form 4562: This form reports your depreciation and allows you to claim the bonus depreciation on your taxes.
4. Consult a Tax Professional: Bonus depreciation can be tricky, especially with its changing rules. A tax advisor can help ensure you’re claiming the maximum deductions and staying compliant.

Summary

Bonus depreciation offers a fantastic opportunity for businesses to reduce taxable income and save money. By understanding which assets qualify, tracking your expenses carefully, and filing the necessary forms, you can take full advantage of this tax incentive. With the ability to claim significant deductions on new and used assets, bonus depreciation can help optimize your tax situation. Be sure to consult a tax professional to navigate the rules and maximize your savings.

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