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How Bonus Depreciation Affects Business Taxes

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    You know all about business depreciation and use it on your business taxes each year. But do you know how much bonus depreciation has changed in the recent tax year? In September 2019, the IRS issued the new final rules and regulations for depreciation and expensing it under the Tax Cuts and Jobs Act.

    It’s important to know how the new regulations are going to affect your business taxes when you file your 2020 taxes. You’re used to taking depreciation on business assets but what depreciation details have changed? How will the new regulations impact your business taxes?

    The good news is the final details for the new regulations reflect and clarify the increases you will now receive in tax benefits. The tax benefits come from the expansion of qualifying property that’s now allowed and authorized by the Tax Cuts and Jobs Act (TCJA). The below information will guide you on how these benefits pertain to your business.

    Bonus Depreciation

    Bonus depreciation is defined as a business acquisition or asset like a vehicle, where the cost you paid for the acquisition is spread out over the life of the asset. Most of the time, you use the asset’s cost spread out over the life of the asset for when you’re filing your business taxes. When you don’t apply depreciation to the bought business asset(s) your company’s financial statement doesn’t look as healthy and positive.

    Your business shows smaller profits or bigger losses in the year you bought your business property asset. That’s because most business assets have significant costs attached to them. For instance, a business automobile, computers, a plane, etc. In practical terms that apply in the following way.


    When you’re self-employed you get a lot of tax benefits that people working for someone else and receiving a salary don’t get. You can write off 50% of what you pay in social security which is what you pay as an employer for your portion of the contributions. Your business deductions don’t need to be itemized on the 1040 and you don’t have to pay any tax on baggage fees if your travel was due to 100% business.

    Under TCJA, your bonus depreciation deductions are doubled and now go from 50% to 100%. The top IRS deductions and depreciation are what and how business owners and the self-employed reduce their taxable income. Also, you used to have to buy property or business assets new to receive the bonus depreciation.

    Now you can buy used property or business assets if you can meet certain criteria. There is a deadline for these new IRS rules and limitations under the TCJA. Unless Congress renews TCJA, the new bonus depreciation rules end on January 1, 2023 so you may want to take full advantage of it now. 

    The New Property Requirements Under TCJA’s Bonus Depreciation 

    There are requirements you need to meet if you want your new business property or asset to meet TCJA bonus depreciation requirements based on the IRS criteria. They are:

    1. The new property or business asset’s original use must begin with the taxpayer who’s claiming it. 
    2. The new property or business asset must be a specific type.
    3. You must put the property or business asset into service in a specified period. The only exception to this rule is there’s certain agricultural property that needs to be planted or grafted in a specified time.

    You also can’t use any property you didn’t buy and use before September 27, 2017 which is when the TCJA went into effect. 

    The Used Property Requirements Under TCJA’s Bonus Depreciation

    There are requirements you need to meet if you want your used business property or asset to meet TCJA bonus depreciation requirements based on the IRS criteria. They are:

    1. Any used business property or asset wasn’t used by the taxpayer at any time before September 27, 2017, when TCJA went into effect.
    2. The acquisition of your used business property or asset meets related party and carryover requirements listed under section 179(d)(2)(A), (B) and (C) and section 1.179-4(c)(1)(ii), (iii), (iv) or (c)(2).

    Also, the acquisition of the used business property or asset also has cost requirements it must meet. Those requirements are listed in section 179(d)(3) and section 1.179-4(d).

    Key Bonus Depreciation Summary

    There are some important things to remember about the new bonus depreciation rules and limitations under the TCJA. You should take your bonus depreciation in the first year your business asset or property is put into service. By taking the bonus depreciation the first year, you deduct a larger percentage of the cost for any of your eligible purchases. 

    But you can still depreciate the business asset or property over a longer period. It’s just not at the more advantageous percentage. You’ll need to use the IRS Form 4562 for all your depreciation and amortization. What’s more, since the rules and limits have changed a few times over the past few years you want to take the time to learn the TCJA regulations and understand they’re set to expire in 2023.

    What Do You Need to Do Now?

    You want to start reviewing any of your recent fixed asset addition. You want to double-check to see if the business asset additions were under a written binding contract before the September 27, 2018 IRS regulation. You may also want to go over with a tax attorney the eligibility requirements based on what you bought and its specified type and use.

    A tax attorney can review your assets to determine if they were placed in service in the time frame allowed for maximizing your bonus depreciation. If they were, it should be reflected in your business depreciation schedules. An expert legal tax professional can also determine whether any of your partnership investments can meet the level rules for bonus depreciation deduction under the criteria defined in Section 743(b).

    There’s no better place to start than now for the new 2020 bonus depreciation when you file your taxes. Every business needs to be taking advantage of the TCJA while it lasts because you never know how much you will save in business taxes unless you try. When you’re ready to know more about tax information or start detailing what you think you can apply to the new bonus depreciation rules and limitations, reach out to us.

    We can help with understanding and using TCJA so it becomes the benefit to business it’s intended to be. 

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