Bonus depreciation and its effect on taxes

Everyone understands the basics of depreciation. You purchase or construct an asset, and the government allows you to take a percentage of that cost, per year, as a tax deduction, thereby reducing net income and the resulting tax burden. From time to time, our friends in Washington D.C. provide extra incentives by allowing “Bonus Depreciation” to one extent or another.

Currently, bonus depreciation is available to owners of for profit, commercial real estate assets via TCJA-Tax Cuts and Jobs Act of 2017, at a rate of 100%!  This means that bonus depreciation allows you to deduct 100% of available depreciation on all asset classes with a depreciation life of 20 years or less.

How does bonus depreciation work?

• Purchase of a for profit, commercial asset

Purchase or build an asset, and place it in service. Once purchased and in-service, extant tangible assets with a useful life of 20 years or less are eligible for bonus depreciation, which is currently at 100% through the end of 2022. 

• Available Bonus Depreciation

The bonus depreciation rate depends on when the asset was placed into service. The guidelines included in the  TCJA-Tax Cuts and Jobs Act of 2017 currently provides 100% bonus depreciation for assets purchased after September 27, 2017 and before January 1, 2023.  The table below displays the depreciation rates by placed in service year: 

The bottom line

Bonus depreciation is an excellent tool for reducing federal income taxes for most commercial real estate owners.  Acting before the existing sunset date for the current law (December 31, 2022) will allow you to take advantage of 100% bonus depreciation on all “short life” assets.  

For a reasonable estimate of what this might mean for you, avail yourself of our free bonus depreciation calculator. Then reach out to us to set up a meeting to discuss how we may assist you in reducing your federal income tax burden.