Not sure what the additional depreciation is or how to take it? Find out how to request additional depreciation for your business assets in this step-by-step guide.
- Business owners should maximize deductions and depreciation as part of their tax strategy.
- While most homeowners use regular depreciation of assets over the tax period, many do not consider the benefits of additional depreciation.
- Depreciation allows a company to write off assets at fair market value or cost over the estimated time they will be used. The additional depreciation allows owners to speed up this process.
- This article is aimed at business owners who want to take advantage of the additional depreciation when filing taxes.
mediaindonesia.net– All business owners want to find ways to maximize their deductions and depreciation for important business assets each year. While you may already benefit from regular asset depreciation, you may not benefit from additional depreciation.
Not sure what the additional depreciation is or how it works? This guide will look at how to apply additional depreciation to your expensive assets during this year’s tax season.
What is bonus amortization?
Depreciation is a tax strategy that allows a company to write off the fair market value or cost of an asset over its expected useful life (how long the company estimates the asset will be used for business needs) .
For example, a moving company uses a large truck for its main commercial activities. The truck costs $ 100,000 and when the company buys it, the owner estimates that the company will use the truck for 10 years. This means they can write off $ 10,000 of expenses on their tax returns every year up to the 10-year limit.
This is a significant gain, but not necessarily enough for most entrepreneurs. This is where bonus amortization comes into play.
The additional depreciation allows business owners to speed up the depreciation process. Companies can therefore amortize the cost of an asset over a year in the same year in which they start using it. In the example above, the business owner could write off more than $ 10,000 when he bought the truck for that fiscal year.
The amount of amortization of the bonus that allows you to cancel depends on the fiscal year. Under the 2017 Tax Cuts and Jobs Act (TCJA), businesses can amortize up to 100% of the cost of any eligible business or property purchased after September 27, 2017 and before January 1, 2023. Previously, entrepreneurs could only write off up to 50% of a given asset.
While it sounds fantastic now, the 100% cancellation limit will start to decrease after 2022. According to Nolo, the amortization bonus rate will decrease as follows over the next few years:
- 2023: Max depreciation up to 80%
- 2024: Max depreciation up to 60%
- 2025: Max depreciation up to 40%
- 2026: Max depreciation up to 20%
To recap, businesses can normally write off only one year’s cost of a given asset to get a better tax return. Bonus depreciation allows businesses to write off more than a single year’s cost of the asset instead. [Read related article: Which Business Assets Are Tangible?]
How does the amortization of the bonus work?
To take advantage of the additional depreciation, you’ll start by determining if you have qualifying business ownership. Once you find out that you have an eligible property, you need to start using the asset in the appropriate fiscal year.
For example, the moving company described above bought a new moving truck in December 2021. However, it does not plan to start using it until January 2022. If so, the company would have to wait until the 2022 tax return is filed to request any further depreciation of the moving truck.
The company must then request additional depreciation on corporate tax returns. In the example above, the mover could request a depreciation of up to 100% on the cost of the moving truck using Form 4562. This form is filed with the main documentation of the corporate tax return.
Election of additional depreciation
While the amortization of the bonus can be useful, some companies may want to opt out. Here are some of the reasons why you might want to opt for additional depreciation:
- You want your tax returns to be more stable or consistent.
- You missed the window to depreciate 100% of the cost.
- Your accountant advises you not to take a bonus depreciation.
You are never required to take bonus depreciation for assets and you can opt out by attaching a return to your business tax return.
However, each owner must make each additional depreciation exclusion option separately. In such circumstances, you can use MACRS depreciation methods or other strategies instead.
How do you qualify for additional depreciation?
While additional depreciation is technically available to all entrepreneurs, only certain types of properties qualify. Let’s see how you can benefit from additional depreciation.
In order for your business to benefit from additional depreciation, you must have a business property that meets at least one of the following criteria:
- It has a maximum useful life of 20 years or less. Land and buildings are excluded, for example, since these assets could be used for much longer than 20 years.
- It’s a qualified improvement property, which covers properties that improve the interiors of nonresidential real properties or commercial buildings.
- It is used for qualified film, television or live theater productions.
- It can be used for both business and personal use (e.g., cameras and vehicles).
There are also more restrictions on how the additional depreciation can be used on vehicles. The IRS has different amortization limits for vehicle bonuses, so business owners cannot claim large tax deductions on cars that are primarily for personal use.
The bottom line is that bonus depreciation can only be used on property that is owned by your business, used for income-generating activities, and has a determinable useful life. The IRS maintains a detailed list of all property types that qualify for regular and additional depreciation.
There are also some restrictions to be aware of when requesting additional depreciation. In addition to the restrictions above for the listed properties, you cannot use the full amount of the additional depreciation if you also use the Section 179 expense deduction, which allows your business to immediately amortize the cost of certain qualifying properties. It has a similar purpose to additional depreciation, but it’s not quite the same.
For example, you can’t apply for Section 179 unless you have a taxable gain to report. Let’s say your business has only $ 10,000 in taxable income before taking the Section 179 deduction. From there, you decide to purchase $ 20,000 worth of machinery or equipment. Your Section 179 deduction is limited to only $ 10,000. You can then request regular depreciation of the remaining $ 10,000 or carry over the unused deduction to the next fiscal year.
How to post additional depreciation on your tax return
Recording or requesting additional depreciation on an asset in your tax return is quite simple. Simply use IRS Form 4562, which allows you to record and review any depreciation notes your business has taken.
This same form will be used to request any other type of depreciation, such as the Section 179 deduction. Review the complete instructions for Form 4562 to make sure you don’t miss a thing and accurately calculate your bonus amortization.
Business owners can use additional depreciation to reduce taxable income on tax returns. Additional depreciation can help you maximize the value of a newly purchased asset sooner rather than later.
However, be sure to use the additional depreciation carefully and when it makes economic sense. You might want to consider using an accountant before taking advantage of bonus amortization, especially across multiple assets.