As a small business owner, you should be taking advantage of every tax break available to you. One powerful deduction that can significantly reduce your taxable income is bonus depreciation. This tax incentive allows businesses to deduct a percentage of the cost of eligible equipment, vehicles, machinery, and other business assets in the year they are placed into service rather than depreciating them over many years.
This Huddle Business Capital blog article explains bonus depreciation and how to utilize it to get a nice tax break. We also include bonus depreciation limits for the current year through 2026.
What is bonus depreciation?
As mentioned above, bonus depreciation is a business-friendly tax incentive that enables companies to write off a percentage of equipment, also referred to as property, in the year it is acquired and put into business use. The only caveat is that the equipment needs to be classified as "qualified business property," which we will cover later in this blog post.
Bonus depreciation was created to encourage business owners to invest in their operations and stimulate the U.S. economy. Capital equipment purchases boost revenues for manufacturers, distributors, and vendors. Of course, new and upgraded equipment can help small businesses in all industries be more productive, generate more income, and stay ahead of competitors.
What qualifies for bonus depreciation?
To take advantage of bonus depreciation, the equipment (property) you procure must meet specific criteria set forth by the Internal Revenue Service (IRS). Here's a list of equipment and assets considered "qualified property" for bonus depreciation. However, we recommend consulting with a business accountant, as the IRS may change the qualification requirements at any time.
- Equipment with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS). This includes business vehicles, machinery, computers, and office furniture and fixtures.
- Depreciable computer software
- Certain water utility property
- Certain leasehold improvement property
- Used equipment not used by the tax-paying business before the equipment was purchased, financed, or leased
- Certain types of equipment used in film, television, or theater production
Bonus depreciation limit by year.
The history of bonus depreciation dates back to 2002, the first year it was introduced as part of the Job Creation and Worker Assistance Act. The initial deduction limit was 30%, and the limit has varied over the years. In 2024, the bonus depreciation limit for qualifying property is 60%. The limit drops to 40% in 2025 and 20% in 2026. Bonus depreciation will phase out completely starting on January 1, 2027.
Remember that the qualified property must be placed into service during the tax year to claim bonus depreciation. For example, if you decide to finance a business vehicle this year, it must be obtained and put into business use by midnight on December 31, 2024.
Don't forget about Section 179.
The Section 179 tax deduction, like bonus depreciation, offers accelerated depreciation in the year that eligible equipment is acquired. However, the two have distinct differences, and understanding them is crucial for making the most advantageous choice for your business.
While bonus depreciation lets you deduct a percentage of the cost of eligible new equipment in the year acquired, Section 179 enables you to deduct the actual cost of the equipment up to a specified limit. For 2024, the Section 179 limit is $1,220,000 on eligible business assets purchased or financed, and the phase-out threshold is $3,050,000. Use Huddle Business Capital's Section 179 calculator to see estimated deduction and bonus depreciation amounts based on the cost of your desired equipment.
How to claim bonus depreciation.
Claiming bonus depreciation is relatively straightforward. When filing your company's tax return, report your bonus depreciation deduction on IRS Form 4562, Depreciation and Amortization. Be sure to attach this form to your business tax return. Proper documentation, such as invoices and proof of payment, should be maintained in case of an IRS audit.
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind.
