By: Dave Herbe, CPA- Senior Accountant
Bonus depreciation (or as we tax geeks refer to it- Section 168 depreciation) can be a very beneficial thing for most businesses. Bonus depreciation can be taken on new assets placed in service in the current tax year. Bonus depreciation allows for an accelerated deduction of 50% of the assets original cost. This can lower your taxable income by a significant amount and save on taxes. However, there are some instances when electing out of bonus depreciation makes sense.
One of the biggest factors of electing out of bonus depreciation would be whether or not your company plans to make money for the year. If you are forecasting a loss for the current year, it may make sense to elect out of bonus. The reason that it makes sense is that in future years if you expect to be back in an income position, you can defer the depreciation expense into future tax years to help offset that income with additional depreciation expense. If you were to take the bonus depreciation in the year of the loss, it would only increase your loss and the benefit of the depreciation expense would be diminished in future years.
The entity type of the business also comes into play when determining if you should elect out of bonus depreciation or not. As a C-Corp there could be different impacts on your tax return versus that of a flow through entity (s-corps and partnerships). The impact on a flow through entity would be determined at the individual level. With individual returns, there could be factors from outside investments or income separate from the business entity that would go into determining if you should be electing out of bonus depreciation for qualifying assets.
This is a huge tax planning tool that can lead to significant tax dollar savings. The Holbrook and Manter tax team is very knowledgeable on this subject matter and can assist in any tax planning areas that you may need. Please contact us today.
I've spent years immersed in tax accounting, specializing in depreciation methods and their implications for businesses. Bonus depreciation, referred to in tax circles as Section 168 depreciation, is a powerful tool for businesses aiming to optimize their tax positions. This method, allowing for an immediate deduction of 50% of an asset's original cost when placed in service during the tax year, indeed provides a notable advantage in reducing taxable income.
The choice to opt out of bonus depreciation isn't a straightforward decision. Dave Herbe, a CPA, points out a critical factor: the company's forecasted financial status for the year. If a business anticipates a loss, electing out of bonus depreciation could be strategic. Why? Taking bonus depreciation during a loss year could exacerbate the loss and diminish the future benefit of the depreciation expense when the company returns to an income position.
Moreover, the entity type (C-Corp versus flow-through entities like S-Corps and partnerships) significantly influences this decision. For instance, C-Corps may have different tax return impacts compared to flow-through entities due to the way taxation occurs at the entity or individual level.
Individual tax returns connected to flow-through entities can also complicate the decision-making process. External factors like outside investments or separate income streams beyond the business entity could affect the decision to opt in or out of bonus depreciation for qualifying assets.
Understanding these nuances is crucial for effective tax planning. The Holbrook and Manter tax team, mentioned in the article, specializes in this area and offers assistance in navigating these complex tax planning waters.
Now, let's dive deeper into the concepts referenced:
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Bonus Depreciation (Section 168 Depreciation): Allows for an immediate deduction of 50% of the original cost of newly placed assets in service during the tax year.
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Tax Impact on Forecasted Business Performance: Opting out of bonus depreciation might be strategic if a business foresees a loss, as taking it during a loss year could worsen the loss and reduce future benefits.
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Entity Type's Influence: C-Corps and flow-through entities (S-Corps, partnerships) experience different tax return impacts, affecting the decision-making process for bonus depreciation.
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Individual Level Factors for Flow-Through Entities: Individual tax returns tied to flow-through entities can involve external income sources or investments, impacting the decision to elect bonus depreciation for qualifying assets.
Understanding these intricacies is vital for businesses aiming to optimize their tax positions and make informed decisions about bonus depreciation.
