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Bonus depreciation is a tax incentive that allows businesses to deduct a larger portion of the cost of certain assets in the year they are placed into service. This means that instead of having to spread the cost of an asset over several years, as is typically required for tax purposes, a business can deduct the entire cost of the asset in the first year.
For example, a business buys a new piece of equipment for $100,000. Without bonus depreciation, the business would have to deduct a portion of the cost each year over several years, reducing their tax liability gradually. But with bonus depreciation, the business can deduct the entire $100,000 in the first year, resulting in a much more significant reduction in their tax liability for that year.
Bonus depreciation was first introduced in the Economic Stimulus Act of 2002. This legislation allowed businesses to deduct 30% of the cost of certain qualifying property in the year it was placed in service. The purpose of this incentive was to encourage businesses to invest in new equipment and property, which would drive economic growth and create jobs.
The current tax legislation extends the provision of 100% bonus depreciation to a wide range of properties, whether newly acquired or pre-owned, obtained after September 27, 2017. This incentive applies to tangible personal property with a depreciable life of 20 years or less and does not extend to real property. A cost segregation study conducted by our experts can assist in identifying such assets eligible for bonus depreciation, thus resulting in a substantial reduction in tax liability. Additionally, it is worth noting that only the excess basis of properties acquired post-September 27, 2017, through a Section 1031 exchange, qualifies for bonus depreciation. Thus, properties with a substantial excess basis stand to gain significantly more from cost segregation in conjunction with bonus depreciation.
Bonus depreciation can be an incredibly powerful tool for investors, particularly those in the commercial and residential real estate space. Here are a few reasons why:
Tax Savings: Bonus depreciation allows investors to immediately deduct a more significant portion of the cost of certain assets in the year they are placed in service. This can result in significant tax savings, which can be used to invest in other business areas or increase cash flow.
Encourages Investment: Bonus depreciation encourages investors to invest in new equipment and property, which can drive economic growth and create jobs. This can be particularly beneficial for real estate investors, as it allows them to invest in new properties or renovate existing ones.
Helps to Maximize Depreciation: By conducting a cost segregation study in conjunction with bonus depreciation, investors can ensure that they are taking full advantage of all available tax incentives and maximizing their depreciation deductions. This can further increase tax savings for investors.
What Is A Cost Segregation Study?
A cost segregation study is a detailed and thorough analysis of the costs associated with a commercial or residential real estate property. Our team of experts, including certified engineers, appraisers, and tax professionals, conducts a comprehensive examination of the property, including an analysis of the costs associated with the construction, renovation, or acquisition of the property.
We can identify property components that qualify for shorter depreciation periods, such as 5, 7, or 15 years, which can help you to reduce your overall tax liability and increase cash flow significantly. Additionally, our cost segregation study can identify other depreciation opportunities, such as Qualified Improvement Property (QIP), which can provide additional tax savings.
We are fully compliant with the IRS regulations, and our study provides clear documentation of the costs, which can be helpful in case of an audit.
A cost segregation study, coupled with bonus depreciation, can be a powerful tool for commercial and residential real estate investors to maximize their tax savings. By identifying all available depreciation deductions, a cost segregation study can help investors significantly reduce their overall tax liability, comply with IRS regulations, and provide professional advice.
Bonus Depreciation Requirements
To qualify for bonus depreciation, there are certain requirements that must be met. These include:
Property Eligibility: Bonus depreciation is typically only available for certain types of property, such as new tangible property that is used for business purposes. This includes assets such as machinery, equipment, vehicles, and certain types of buildings.
Placement in Service: The property must be placed in service during a specific period of time. For example, under the Tax Cuts and Jobs Act of 2017 (TCJA), bonus depreciation is available for property placed in service before January 1, 2023.
Original Use: The property must be new and used for the first time by the taxpayer. Property acquired from a related party or in a like-kind exchange does not qualify.
Side Note: When acquiring a property through a Section 1031 exchange and considering a cost segregation study, it is imperative for tax professionals to consider maximizing the basis on which the cost segregation study can be applied. This entails a thorough review of the Section 1031 exchange basis calculations before recommending a cost segregation study to clients. Failure to do so may result in overestimating or underestimating potential tax savings. To ensure optimal results, it is advisable to engage in thorough planning and work with a cost segregation firm with extensive experience and expertise in handling Section 1031 exchanges. At Saba Tax Advisory, we pride ourselves on our proficiency in navigating the intricacies of cost segregation and 1031 exchanges, providing our clients with tailored solutions that deliver optimal results.
Percentage: The percentage of the cost that can be deducted as bonus depreciation can change depending on the laws in effect. Under the TCJA, the bonus depreciation percentage is 100% for property placed in service before January 1, 2023; then, it decreases by 20% annually until 2026.
Limitations: There are also limitations on the amount of bonus depreciation that can be claimed. For example, bonus depreciation is limited to the taxpayer's taxable income from the business that uses the property.
It's important to note that bonus depreciation rules and requirements are subject to change. It's crucial for businesses to stay informed and consult with a tax advisor to ensure they are taking full advantage of this incentive before it expires.
When Will Bonus Depreciation Be Gone?
As the clock ticks closer to the end of 2023, time is of the essence for businesses to take full advantage of one of the most significant provisions of the Tax Cuts and Jobs Act (TCJA); the 100% bonus depreciation on a wide variety of assets deemed as "qualified property". The TCJA has extended the bonus depreciation rules, which were set to expire at the end of 2019, and has increased the deductible amount to 100% for assets placed in service after September 27, 2017, and before January 1, 2023. However, unless there are any changes to the current law, the bonus percentage will decrease by 20 points each year over the next few years, ultimately phasing out completely by 2027.
2022 = 100%
2023 = 80%
2024 = 60%
2025 = 40%
2026 = 20%
2027 = 0%
Don't miss out on this valuable opportunity to maximize your tax savings and invest in your business with confidence. At Saba Tax Advisory, we have the expertise and resources to help you navigate the complexities of bonus depreciation and make the most of this limited time offer.
As a leading advisory firm specializing in cost segregation studies, Saba Tax Advisory is dedicated to helping commercial and residential real estate investors minimize their tax liability and maximize their return on investment. Our cost segregation studies are a powerful tool that can help you take full advantage of all available tax incentives. Trust us to guide you through the complexities of real estate investments and provide expert advice. Contact us today to learn more about how a cost segregation study can benefit your real estate investments.
The information provided in this blog is intended for general information only, and is not meant to constitute tax advice.