Accelerate depreciation to reduce your business’s 2022 tax bill
Many businesses have had a turbulent year, and the current economic situation foresees even more uncertainty. However, regardless of your company’s performance thus far, there is still time to take actions that can lower your federal tax obligation for 2022. Continue reading on how to accelerate depreciation, something you may want to consider. Keep an eye out for more!
Accelerate depreciation — while you can
In addition to the QBI deduction, the Section 168(k) first-year bonus depreciation also rose to 100% of the purchase price through 2022 under the Tax Cuts and Jobs Act (TCJA). As a result, the allowable deduction will decrease by 20% annually. This would start in 2019 and completely disappear in 2027 (again, absent congressional action). For 2022, there may be significant tax savings if bonus depreciation and the Section 179 deduction are combined.
You can deduct 100% of the purchase price of new and used qualifying assets under Section 179 the year you put them in service, even if only for a few hours or days. Machinery, office and computer equipment, software, and some commercial vehicles are examples of eligible assets. The discount is also available for non-residential property upgrades.
A dollar-for-dollar phasing out of the Sec. 179 deduction, which has a cap of $1.08 million for 2022, starts when the value of your eligible property acquisitions exceeds $2.7 million. After that, the amount of your company income is also the maximum deduction. You may carry forward any unused amounts forever.
Alternatively, you can write off surplus amounts as bonus depreciation with no caps or phaseouts after 2022. Computer systems, software, vehicles, machinery, equipment, office furniture, and qualified improvement property are all eligible for bonus depreciation. Generally, that is for interior improvements to non-residential property.
Turn to us for planning advice
Despite their apparent attractiveness, bonus depreciation and Sec. 179 expensing are only sometimes a good idea. If you take the QBI deduction, for instance, you might opt to forego accelerated depreciation. Your ability to deduct expenses caps by your taxable income, which depreciation lowers.
To take advantage of the QBI deduction while it is still available, it could be a good idea to have some depreciation available to offset your income from 2023 through 2025. You might also pause if you have credit carryforwards, expiring net operating losses, or charitable contributions with an impact from taxable income.
You don’t have to choose immediately, which is good news. Instead, you can select the most beneficial strategy when you submit your tax return in 2023. However, you must put the eligible property in operation by December 31, 2022.
The solution described here and in our upcoming blog posts entails compromises that require careful consideration, analysis, and evaluation. To reduce the tax burden on your business, contact our RRBB accountants and advisors to assist you in making the best decisions.
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