If you own a business, you’re probably familiar with the fundamentals of depreciation. The government permits you to deduct a portion of the cost of an asset you buy or build from your income each year, as a tax deduction. This process lowers your net income and corresponding tax liability. Occasionally, our friends in Washington, D.C provide additional incentives by permitting “Bonus Depreciation” to varying degrees.
Bonus depreciation combined with cost segregation is a benefit property owners and real estate investors may be able to incorporate if it is identified as part of a cost segregation study. It is the ability to deduct a larger portion and as a result lower income taxes more significantly for owners of assets or property purchased in the first year. Thanks to the Tax Cuts and Jobs Act of 2017, property owners have the ability to deduct bonus depreciation at a rate as high as 100% on profitable commercial real estate investments, depending on the year of purchase! This means bonus depreciation allows you to deduct 100% of available depreciation on all asset classes with a depreciation life of 20 years or less for property purchased between September 27, 2017, through the end of 2022.
How does bonus depreciation work?
There are two things you need to know to make bonus depreciation work for you:
- Purchase of an asset for profit; commercial asset
Purchase or build an asset and place it in service. Once purchased and in-service, existing tangible assets with a useful life of 20 years or less are eligible for bonus depreciation, which is currently at 60% through the end of 2024.
- 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 Job Act currently provides 100% bonus depreciation for assets purchased after September 27, 2017, and before January 1, 2023. But starting in 2022, the 100% bonus depreciation began tapering off, with qualified property purchase in 2024 only receiving a 60% benefit. The table below displays the depreciation rates by placed in service year:
| Assets placed into service | Bonus depreciation rate |
| 2020 | 100% |
| 2021 | 100% |
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
The bottom line
Bonus depreciation combined with cost segregation is an excellent tool for reducing federal income taxes for most commercial real estate owners. Act now to take advantage of remaining bonus depreciation on all “short life” assets. Short life assets are an asset with useful life predicted to be less than eight years.
For a fair assessment of how you can incorporate this process to reduce your taxes, take advantage of our free bonus depreciation calculator. Contact O’Connor to schedule a meeting to discuss how we may assist you in reducing your federal income tax burden.