As the year-end approaches, business owners should take full advantage of available tax strategies to reduce their tax liability. One powerful tool in your tax planning arsenal is bonus depreciation. If used strategically, this can significantly reduce your taxable income and improve your cash flow. Let’s explore how you can leverage bonus depreciation before the year ends.

What is Bonus Depreciation?

Bonus depreciation allows businesses to deduct a significant portion of the cost of qualifying assets in the year they’re purchased and placed into service. Unlike regular depreciation, which spreads the deduction over several years, bonus depreciation accelerates this benefit, providing immediate tax relief.

For 2023, businesses can still claim 80% bonus depreciation on qualifying assets (down from 100% in previous years), but this percentage will continue to phase down in future years. This makes year-end planning crucial to maximize the benefit while it’s still substantial.

Qualifying Assets for Bonus Depreciation

To take advantage of bonus depreciation, the assets must generally:

1. Be new or used (but not previously used by your business).

2. Have a useful life of 20 years or less. Examples include:

   • Machinery and equipment.

   • Computers, software, and other technology.

   • Furniture and fixtures.

3. Be purchased and placed into service before the end of the tax year.

Key Benefits of Bonus Depreciation

1. Immediate Tax Savings: Accelerating deductions means you’ll pay less in taxes now, freeing up cash for reinvestment or other priorities.

2. Flexibility with Used Assets: Unlike Section 179 deductions, bonus depreciation applies to both new and used assets, providing more opportunities for savings.

3. Tax Rate Arbitrage: If you anticipate being in a higher tax bracket in future years, claiming deductions now could be more beneficial.

Year-End Action Steps

To maximize your tax savings:

1. Review Your Capital Expenditures: Assess whether planned purchases for next year can be accelerated into the current year.

2. Evaluate Financing Options: If cash flow is tight, consider financing purchases. Bonus depreciation applies even if the asset isn’t fully paid off by year-end.

3. Confirm Eligibility with Your Accountant: Not all assets qualify, so work with your tax professional to ensure compliance and maximize deductions.

4. Time Purchases Strategically: Assets must be in use by December 31 to qualify, so plan accordingly.

Bonus Depreciation vs. Section 179

While both bonus depreciation and Section 179 deductions allow for accelerated expensing, they have key differences:

• Bonus Depreciation: No limits on total spending, applies automatically unless opted out.

• Section 179: Has annual limits and applies only to new or certain used assets.

Your accountant can help you decide which method works best for your business based on your financial situation and tax goals.

Plan Now, Save Big

With bonus depreciation phasing out in the coming years (60% in 2024, 40% in 2025, and so on), it’s essential to act now to take full advantage of this tax-saving opportunity. By incorporating bonus depreciation into your year-end tax strategy, you can save thousands and set your business up for success in the new year.

Need help creating a comprehensive tax strategy? Let’s connect to ensure you’re keeping more money in your pocket this year!