If you asked Republicans, perhaps nothing embodies both aspects of the Tax Cut and Jobs Act more than the obscure bonus depreciation deduction. Lawmakers hope this change will reduce business taxes and spur job growth. That sounds like a win-win, right?
Perhaps not. Especially in light of the generous Section 179 deduction, deferring the bonus may be a good idea. It may be a difference of paying more now or paying more later. Only a long conversation with a certified tax planner can adequately address this conundrum.
Depreciation Bonus Ground Rules
When businesses purchase new capital equipment, like machine tools and motor vehicles, they generally deduct the value of the equipment as it depreciates over time (straight-line depreciation). But every so often, Congress changes the rules to spur new capital equipment purchases and, hopefully, additional hiring to operate the new equipment.
Before the TCJA, Congress offered a 50 percent depreciation bonus on newly-purchased capital equipment. That bonus is on top of any Section 179 deduction.
Under the TCJA, that capital purchase depreciation bonus doubles to 100 percent. To qualify, said property must be purchased after September 27, 2017 and placed into service before January 1, 2023. Partial bonuses are still available through 2026.
This legislation also changed the definition of “capital equipment.” More types of purchases, including used equipment, now qualify for the bonus deduction.
Doing What’s Best for Your Business
The best approach for your business largely depends on future revenue forecasts. The size of your future tax bracket may determine the best stance with regard to bonus depreciation. Also, remember that the time value of money may be important. Generally, due to inflation, a dollar today is worth more than a dollar tomorrow.
Depreciation length may come into play as well. Typically, businesses can depreciate capital equipment for either five or seven years. Depreciation length may affect the amount of forecasting you do with your certified tax planner.
If you anticipate relatively flat growth over that period, maximizing bonus depreciation is probably a good idea. The bonus defers tax payment, and as mentioned, the money you save today is more valuable than the money you give to the IRS tomorrow. This calculation makes sense if revenue increases do not put you into a much higher tax bracket.
On the other hand, if your business is growing, and you believe that growth will continue for the next several years, bonus depreciation may be a bad idea. Preserving depreciation deductions for future years could be better for your bottom line. That’s especially true because there is a multiplier effect. Higher business income makes tax deduction percentages more valuable.
You do not have to make this decision alone, and you do not have to base it on guesswork. A certified tax planner has seen it all before, and that experience is invaluable. Additionally, there are information tools available, like cost segregation studies, which allow you to make data-based decisions.
As a Certified Tax Coach, our advanced training is designed to lower your taxes and increase your wealth. Request your free consultation today by calling us at 903-793-0042. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.