What You Need to Know about Bonus Depreciation
As you wrap up the year, you surely have a few key financial metrics on your mind like net income and its accompanying tax liability. As you work to manage that tax liability, don’t forget about bonus depreciation. There’s still time left in the year to take advantage of this component of the 2018 tax law changes, and the result could mean writing a smaller check to the Feds in the spring.
What is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses to deduct additional value of equipment in the same year it was purchased, beyond the amount you’d be able to deduct regularly.
As any good accountant or banker could tell you, the purchases you make for your business depreciate over time. Each year, the “value” of the item goes down by a specified increment. This lessens your tax liability on that piece of equipment.
Historically, bonus depreciation has been an incentive offered by the Federal government to spur spending, enabling businesses to depreciate the first year’s value plus an additional percentage of that annual amount. Some years, bonus depreciation has been at 100 percent, equating to one full year of depreciation, plus another full year. However, bonus depreciation is not guaranteed to be offered every year, and certainly not at this level.
Benefits of Bonus Depreciation
The benefit of bonus depreciation all comes down to tax liabilities. By having equipment in place within the calendar year 2018 – even for one day – you have the benefit of having it the whole year, plus an additional “bonus” percentage. Bottom line: it can save your business money.
What’s Bonus Depreciation at for 2018?
Since the U.S. economy is doing fairly well, bonus depreciation for 2018 is 100 percent. This means that an additional 100 percent depreciation is allowed for the first year equipment is in place. There are stipulations that come with the deal:
- The equipment must be in place by Dec. 31, 2018.
- The equipment has to have been purchased in the U.S.
- The equipment must be new (versus used).
So, why now? Why not wait to buy equipment until next year, when bonus depreciation could be higher? Well, for one, we don’t know whether businesses will be offered any bonus depreciation next year. And, if you’ve had a good year and know new equipment is on the horizon, now may be a great time to see how making that purchase in 2018 could benefit your business.
Three next steps
- Consult your tax advisor to see how bonus depreciation could impact your business.
- When you’re ready to purchase new equipment, give me a call and I’ll walk you through the leasing and financing options that are best suited for your business.
- Learn more about Bankers Trust’s Equipment Finance division.