Depreciation is a major source of tax deductions for most businesses. Depreciation methods used for internal management purposes are often times different than those methods used for tax purposes. It’s worth analyzing your processes in this area every year to make sure you are fully using the incentives provided in the Tax Code.
A depreciation expense represents the portion of tangible property value that gets used up during the course of the year. It’s not available for land, but the deduction does apply to big-ticket items like:
To more quickly recover the costs of investment, keep the following in mind:
- Immediate expensing: Businesses have two options that provide immediate expensing of certain types of capital expenditures.
- Section 179 allows businesses to expense the full cost of qualifying property in the year it is placed in service. The Tax Cuts and Jobs Act increased the maximum deduction for Section 179 property from $500,000 to $1 million per year for property placed in service after December 31, 2017. In order to keep this provision focused on smaller businesses, the deduction amount is reduced dollar-for-dollar once asset spending exceeds $2.5 million in the year. For example, a business that invests $2.6 million in qualifying property can immediately expense $900,000 and must depreciate the remaining $1.7 million over the applicable recovery periods.
- Bonus depreciation is another code provision allowing businesses to claim 100% of an asset’s depreciation when that asset is placed into service. It applies to qualified assets that are placed into service from 09/27/2017 through 12/31/2022. After 2022, the 100% expensing gets gradually reduced.
- Improvements to nonresidential property: Improvements to nonresidential real property also now qualify for the Section 179 deduction mentioned above. Improvements that qualify include, but are not limited to:
- Changes to a building’s interior
- A new roof
- Heating and air conditioning systems
- Fire protections systems
- Alarm and security systems
- Segregating costs can speed recovery: If your business exceeds the $2.5 million threshold, there are still ways to recover your investments more quickly by segregating the costs of significant improvements. Different types of building improvements depreciate over different periods, so tracking them separately can lead to larger depreciation expenses in the periods following the upgrades.