NEW 100% Bonus Depreciation is Back! How To Use It To Save On Taxes

Introduction

This tutorial will guide you through the benefits of the newly reinstated 100% Bonus Depreciation and how you can leverage it to reduce your tax burden. With the recent changes in tax law, this provision allows business owners and independent contractors to make strategic purchases that can significantly enhance their financial position. Let's explore the essential steps to maximize this opportunity.

Step 1: Understand Bonus Depreciation

• Definition: Bonus depreciation allows businesses to immediately deduct a large percentage of the purchase price of eligible assets rather than spreading the deduction over the useful life of the asset.
• Current Rate: The bonus depreciation rate has been set back to 100%, meaning you can deduct the full cost of qualifying assets in the year they are purchased.
• Retroactive Application: This depreciation can be applied retroactively to assets acquired after January 19, 2025.

Step 2: Identify Eligible Assets

• Qualifying Assets: Typically, the following assets qualify for bonus depreciation:
  • Machinery and equipment
  • Certain improvements to nonresidential real property
  • Some vehicles (if used for business purposes)
• Exclusions: Assets like land, buildings, and certain intangible assets do not qualify.

Step 3: Fulfill the Requirements

To fully benefit from bonus depreciation, ensure you meet these criteria:

1. Asset Acquisition: You must purchase the asset rather than lease it.
2. Business Use: The asset must be used for business purposes more than 50% of the time.
3. Placed in Service: The asset must be placed in service during the tax year in which you want the deduction.
4. New or Used: Both new and used assets qualify for bonus depreciation.

Step 4: Plan for Depreciation Recapture

• Understanding Recapture: If you sell an asset that has been depreciated, you may have to "recapture" some of the depreciation as income, which could increase your tax liability in the year of sale.
• Planning Tip: Consider the long-term implications of selling depreciated assets and consult a tax professional to strategize effectively.

Step 5: Implement Tax Planning Strategies

• Maximize Deductions: Consider purchasing eligible assets before the end of the tax year to maximize your deductions.
• Future Investments: Use the tax savings from bonus depreciation to reinvest in your business or save for future expenses.
• Consult with a CPA: Regularly consult with a tax advisor to ensure compliance and optimize your tax strategy.

Conclusion

The reinstatement of 100% Bonus Depreciation presents a significant opportunity for business owners and independent contractors to reduce their tax liabilities and reinvest in their businesses. By understanding how bonus depreciation works, identifying eligible assets, and planning strategically, you can maximize your savings. Consider reaching out to a CPA for personalized advice to navigate this tax benefit effectively.