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- 100% First-Year Bonus Depreciation: Big Tax Savings for small business
100% First-Year Bonus Depreciation: Big Tax Savings for small business
When you buy equipment, you can usually deduct the cost over several years. But with 100% first-year bonus depreciation, you can deduct it all!
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Key Highlights:
What Is 100% First-Year Bonus Depreciation?
How It Affects Your Tax Return
Potential Tax Savings
Examples of Eligible Depreciable Items
Property Categories and Recovery Periods
When NOT to Use 100% First-Year Bonus Depreciation
Frequently Asked Questions
What Is 100% First-Year Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses to deduct a large percentage of the cost of eligible assets in the year they're placed in service, rather than spreading the deduction over several years. Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation first became available for qualified property placed in service after September 27, 2017.
However with recent legislation, The One Big Beautiful Bill Act (OBBBA), 100% bonus depreciation is now permanently available for qualified property acquired and placed in service after January 19, 2025. This reverses the previously scheduled phase-down of bonus depreciation that was set to reduce the rate to 40% in 2025 and eventually to 0% by 2027.
Think of it as an immediate discount on your taxes. Instead of waiting years to get the full tax benefit from a business purchase, you get it all upfront. This can significantly improve your cash flow and reduce your tax bill right away.
How It Affects Your Tax Return
When preparing your tax return, 100% bonus depreciation allows you to deduct the entire cost of qualifying business property on Form 4562 (Depreciation and Amortization). This deduction directly reduces your business's taxable income, which means you pay less in taxes for that year.
Example: If your business purchases a $50,000 delivery truck in 2022, you can deduct the full $50,000 on your 2022 tax return. If you're in the 24% tax bracket, this could save you $12,000 in taxes immediately, rather than spreading those savings over several years.
Potential Tax Savings
The tax savings from 100% first-year bonus depreciation can be substantial. The exact amount depends on your tax bracket and the cost of the assets you purchase.
Purchase Amount | Tax Bracket | Potential Tax Savings | Cash Flow Improvement |
$10,000 | 22% | $2,200 | Immediate |
$50,000 | 24% | $12,000 | Immediate |
$100,000 | 32% | $32,000 | Immediate |
$500,000 | 35% | $175,000 | Immediate |
Without bonus depreciation, these savings would be spread over several years (typically 5-7 years for most business equipment), which means you'd have to wait much longer to realize the full tax benefit.
Examples of Eligible Depreciable Items
Many types of business assets qualify for 100% first-year bonus depreciation. Here are some common examples:
Office Equipment
| Furniture & Fixtures
|
Vehicles & Equipment
| Land Improvements
|
Important Note
Land itself is never eligible for depreciation, as it doesn't "wear out" over time. However, improvements to land (like those listed above) can be depreciated.
Property Categories and Recovery Periods
Without bonus depreciation, different types of property are depreciated over different time periods. Understanding these categories helps you see the benefit of 100% first-year bonus depreciation.
Property Category | Examples | Normal Recovery Period | With 100% Bonus |
3-Year Property | Tractors, certain manufacturing tools, breeding livestock | 3 years | Immediate deduction |
5-Year Property | Computers, office equipment, cars, light trucks | 5 years | Immediate deduction |
7-Year Property | Office furniture, appliances, most machinery | 7 years | Immediate deduction |
15-Year Property | Qualified improvement property, land improvements | 15 years | Immediate deduction |
27.5-Year Property | Residential rental buildings | 27.5 years | Not eligible |
39-Year Property | Commercial buildings | 39 years | Not eligible |
When NOT to Use 100% First-Year Bonus Depreciation
While 100% first-year bonus depreciation offers immediate tax savings, it's not always the best choice. Here are situations when you might want to skip it:
Low Current Income
If your business has low taxable income this year but expects higher income in future years, regular depreciation might provide more tax benefit over time as your tax rate increases.
Planning to Sell Soon
If you plan to sell the property soon, bonus depreciation could result in higher "recapture" taxes. Gains on sale up to the amount of bonus depreciation taken may be taxed at ordinary income rates (up to 37%) rather than lower capital gains rates.
Qualified Business Income Deduction
Taking bonus depreciation reduces your Qualified Business Income (QBI), which might reduce your Section 199A "pass-through" deduction (up to 20% of QBI). In some cases, this could offset the benefit of bonus depreciation.
Remember: Choosing not to take bonus depreciation only affects the timing of your deductions, not whether you can deduct the full cost of the asset eventually.
Opting Out
You can elect not to claim bonus depreciation for any class of property. This election must be made on your tax return for the year the property is placed in service. Once made, this election can only be revoked with IRS consent.
Frequently Asked Questions
Can I claim 100% bonus depreciation on used equipment?
Yes, both new AND used property can qualify for bonus depreciation, as long as it's new to your business. This is a significant change from previous rules (prior to 2018) that only allowed bonus depreciation for new property.
What's the difference between Section 179 and bonus depreciation?
While both allow immediate deduction of asset costs, Section 179 has dollar limits ($2,500,000 for 2025) and can't create a business loss. Bonus depreciation has no dollar limit and can create or increase a loss. Section 179 must be specifically elected, while bonus depreciation is automatic unless you opt out.
Can I claim bonus depreciation on a vehicle?
Yes, vehicles used for business purposes can qualify for bonus depreciation. However, there are special limits for passenger vehicles. Heavier vehicles (over 6,000 pounds gross vehicle weight) used for business may qualify for the full bonus depreciation without these limits.
What does "placed in service" mean?
An asset is considered "placed in service" when it's ready and available for its specific business purpose, not necessarily when you purchase it. For example, if you buy equipment in December 2024 but don't set it up and make it ready for use until January 2025, it would be considered placed in service in 2025.
Can I choose not to take bonus depreciation?
Yes, you can elect not to claim bonus depreciation for any class of property. This election must be made on your tax return for the year the property is placed in service. This might be beneficial if you expect to be in a higher tax bracket in future years or have other tax considerations.
To learn more strategies for reducing your tax burden and maximizing your take-home pay, check out Taxation Intel
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