Everything You Need To Know About Bonus Depreciation for the 2024 Tax Season
When it comes time to file your 2024 taxes, most business owners want to optimize their tax planning and manage their taxes. Bonus depreciation, which lets businesses immediately deduct a significant percentage of the cost of qualifying business property, is a helpful tax management tool. However, bonus depreciation rules are changing, and you want to know what it means for your business. Find out everything you need to know about bonus depreciation in the 2024 tax year.
What is Bonus Depreciation?
Bonus depreciation allows businesses to take a significant deduction on qualified assets in the first year of use for the company instead of spreading the deduction over the asset's life. This bonus depreciation method allows corporations to decrease their taxable income for the year they purchase and begin using these qualifying assets.
Historically, the bonus depreciation rate was 100% so that companies could deduct the entire cost of eligible assets in the year of the asset’s deployment for use by a company. However, changes in the tax law mean that from 2023 onward, the rate goes down by 20% per year.
Fundamental Changes for the 2024 Tax Season
In 2024, the bonus depreciation rate decreases to 60%.¹ Here’s a quick look at the schedule based on the year of first use for an asset placed in service:
● 2023: 80%
● 2024: 60%
● 2025: 40%
● 2026: 20%
● 2027 and beyond: 0% (unless Congress extends the provision)
This change means that for the 2024 tax year, businesses may only deduct 60% of the cost of eligible assets. The remaining 40% of the depreciation deduction comes in portions over the asset's useful life.
What qualifies for bonus depreciation?
Not all business assets get bonus depreciation. Here’s how the assets qualify.
● Tangible Assets: Most tangible assets with a useful life of 20 years or less qualify. Examples are machinery, equipment, office furniture, computers, and some vehicles used for the business.
● Qualified Improvement Property (QIP): Upgrades made to the interior of a non-residential property, such as new lights, HVAC, or renovations, are eligible for bonus depreciation.
● Some Computer Software: Computer software not for resale may be eligible for bonus depreciation.
● Inventory: Bonus depreciation might be allowed for inventory if it’s brand new to the company and otherwise qualified.
Excluded assets are real estate (such as buildings or land) and properties with more than 20 years of useful life.
How Bonus Depreciation Works in 2024
Businesses may benefit from the 60% bonus depreciation rate for 2024 taxes. Here’s a simple example:
Let’s say your company invests $100,000 in machinery in 2024. With the new 60% rate, you immediately deduct $60,000 (60%) for the first year. The other $40,000 becomes an ongoing deduction, taken in portions over the asset’s useful life under the corresponding depreciation schedule.
Benefits of Bonus Depreciation
Bonus depreciation provides some positive effects on a company’s bottom line:
● Tax Savings in an Instant: By taking a higher deduction in the first year, bonus depreciation helps lower your taxable income and tax bill.
● Better Cash Flow: Lower tax expenses translate into more cash for operations, expansion, or other business requirements.
● Simple Depreciation: Businesses streamline accounting by taking bonus depreciation on qualifying assets instead of maintaining multiple asset depreciation cycles over several years.
Drawbacks and Considerations
Bonus depreciation is usually beneficial, but some businesses might have better options. Here are a few considerations:
● Lower Deductions in Future Years: If you take bonus depreciation to deduct most of the cost of an asset in the first year, those deductions are not available in future years, increasing your taxable income later on.
● Phase-Down Effect: As bonus depreciation is being phased down from 100% to zero, the tax incentives are less generous than in previous years, and businesses must plan accordingly.
Bonus depreciation may be a significant tax-saving measure for corporations, especially if you buy machines, equipment, and other eligible assets. Now that the phase-down is 60% through the 2024 tax year, it’s time to plan when and how you invest in eligible assets. Keeping up with the changes in the rules and consulting with a tax professional is helpful with deductions and managing your taxes.
Footnotes
¹Bonus Depreciation Rates
https://www.investopedia.com/terms/b/bonusdepreciation.asp
Important Disclosures
Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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