What is Depreciation?
Since 1985, taxpayers use the Modified Accelerated Cost Recovery System (MACRS) to depreciate property placed in service. Depreciation allows businesses to write off an asset’s costs over its useful life. Under MACRS an assets useful life or depreciation period is referred to as the “recovery period”. The recovery period of an asset varies based on the type of business the asset is involved in. Certain assets, however, are assigned a recovery period without regard to a taxpayer’s business activity.
Some of these assets include:
Commercial Property – 39 Year Recovery Period
Residential Rental Property – 27.5 Year Recovery Period
Land Improvements – 15 Year Recovery Period
Vessels, barges and tugs – 10 Year Recovery Period
Office Furniture and Equipment – 7 Year Recovery Period
Computers and Related Equipment – 5 Year Recovery Period
Automobiles, light and heavy general purposes trucks – 5 Year Recovery Period
Over the Road Tractor Units – 3 Years.
What is bonus depreciation and why is it important?
Bonus depreciation is an accelerated form of depreciation. It is one of the most powerful tax deductions.
Rather than having to depreciate an asset over its useful life, bonus depreciation allows for 100% depreciation of qualified business property in the year placed in service. Qualified business property includes:
· MACRS property with a recovery period of 20 years or less
· Computer Software (not including software obtained as part of an acquisition)
· Qualified Improvement Property placed in service between 2015-2018
· Films, theatrical and TV productions placed in service post September 27, 2017
For example, say a taxpayer made a land improvement to their property that cost 150,000. Previously it would take 15 years to realize the full 150,000 tax deduction from depreciation (10,000 deduction per year for 15 years). With bonus depreciation, the taxpayer can take the full 150,000 deduction in the year the land improvement was placed in service.
2022 is the last year taxpayers can claim 100% bonus depreciation. In 2023 taxpayers are able to claim 80% bonus depreciation and less in years following.
Reach out to us today to see how your business can benefit from bonus depreciation.