Appreciate these Depreciation Tax Breaks

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If your business has been ramping back up at year end, you may need to buy business property for the rebound. Fortunately, you can potentially benefit from several key depreciation-related tax breaks.

4 Helpful Provisions

Give your business an edge by taking advantage of the following four tax provisions:

1. Section 179 expensing. Under Section 179 of the tax code, your business can enjoy an immediate tax benefit from qualified business property placed in service in 2020. Sec. 179 allows you to “expense” (that is, currently deduct) the full cost of the property, up to a generous limit.

But the deduction can’t exceed the amount of income from the business. For instance, if this year’s income is $750,000, the maximum Sec. 179 deduction is $750,000. And the annual deduction is subject to a phaseout above a specified threshold.

The maximum Sec. 179 deduction for 2020 is $1.04 million. The deduction begins to phase out dollar-for-dollar when asset purchases exceed $2.59 million for 2020. (The amounts are annually indexed for inflation.)

Eligible property includes new or used assets such as equipment, furniture, and off-the-shelf software, as well as improvements to roofs, HVAC equipment, fire protection and security systems for nonresidential real property, and certain property used to provide lodging.

2. Bonus depreciation. A first-year “bonus depreciation” deduction of 100% is available for qualified property placed in service in 2020.

For this purpose, the qualified property includes new and used tangible property depreciable under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. (See No. 3.)

But be aware that the bonus depreciation deduction is scheduled to be phased out, beginning with property placed in service in 2023, as follows:

  • 80% in 2023,
  • 60% in 2024,
  • 40% in 2025, and
  • 20% in 2026.

After 2026, bonus depreciation will no longer be allowed, unless Congress revives this tax break. (For certain properties with longer production periods, these reductions are delayed by one year.)

3. MACRS deductions.MACRS is generally associated with “regular” depreciation deductions that businesses have been claiming for decades. Under MACRS, the cost of qualified property placed in service is recovered over a period of years. This depreciation system is designed to provide bigger write-offs in the early years of ownership.

Annual deductions are based on the “useful life” of the property. For example, computers have a five-year write-off period, while most other types of equipment are depreciated over seven or 15 years. Typically, your small business is allowed to supplement Sec. 179 and bonus depreciation deductions with MACRS deductions to address any remaining cost.

But beware: If the cost of the property (not including real estate) placed in service in the last quarter of the year exceeds 40% of the cost for the entire year, MACRS deductions are generally reduced. Watch out for this “hidden” tax trap at year-end.

4. Qualified improvement property. Take note of special rules for qualified improvement property (QIP). The definition of QIP includes improvements to an interior portion of nonresidential real estate if the improvement was placed in service after the date the building was placed in service. But it doesn’t include the enlargement of a building, any elevator or escalator, or the internal structural framework of a building.

Congress intended for QIP to have a 15-year recovery period, so it would be eligible for first-year bonus depreciation. Due to a drafting error, though, 2017’s Tax Cuts and Jobs Act omitted this change. The problem was rectified by the Coronavirus Aid, Relief, and Economic Security Act, signed into law in March, which establishes a 15-year cost recovery period for QIP — making it eligible for 100% bonus depreciation. As a result, your small business may file an amended return for the 2018 or 2019 tax years.

Get professional advice for the details

Keep in mind that, depending on your situation, it might not make sense for you to maximize your 2020 depreciation deductions. For instance, if you expect to be in a higher tax bracket in the future, you might be better off forgoing Sec. 179 expensing and 100% bonus depreciation. After all, tax deductions are more valuable when you’re paying tax at a higher rate.

This is only a brief overview of the basic depreciation rules. Your Belfint advisor can provide full details that take into account your specific situation.

Need Additional Information?

If you need more information, please contact us so we can connect you with one of our CPA advisors who will be committed to your business and personal success. BLS is here to help!