With the 2024 tax year wrapping up, it’s important to understand bonus depreciation for 2024 and cost segregation and how they can impact your taxes. Some tax benefits will prove beneficial for businesses when filing 2024 taxes.
What is Bonus Depreciation?
The term bonus depreciation focuses on first-year depreciation, where a business can deduct a large asset purchase related to the business purchased during that tax year from its business taxes. This is ideal for small businesses that may have bought assets and need to use the IRS Form 4562 to record business depreciation. These assets will depreciate downward, with the remaining percent for the next tax year and spread over seven years.
When bonus depreciation was introduced in 2018, it started at $100% and held until 2022. The 2023 tax year saw an 80% bonus depreciation, and it is continuing to depreciate further. For 2024, the current bonus depreciation rate is at 60%. An example is when a piece of equipment is purchased at $100,000, and the business can utilize $60,000 of that depreciation in 2024. The other 40% of the asset value will start a traditional amortization in the 2025 tax year and slowly depreciate for the next seven years.
Eligible Assets
Depending on your business type, you may have several assets eligible for bonus depreciation in 2024. Below are some of the most popular assets utilized on IRS form 4562:
- Commercial property renovations related to improving business operations
- New commercial vehicles or delivery trucks
- Office machinery (new or used)
Other assets could be used, but these are the most common because of the overall cost and the maximized tax benefit they bring to the business. For example, suppose your business purchased a new delivery vehicle and office machinery. In that case, you’ll likely use the new delivery vehicle over the office machinery because it is more expensive and will offer a larger bonus depreciation.
Cost Segregation vs. Bonus Depreciation
Bonus depreciation allows businesses to reduce their overall tax responsibility, reduce what they’re paying, and give more incentive to keep operating their business for the following year. This cost segregation breaks down this business property, allowing them to incentivize these assets for the industry further.
Companies that may have had a questionable financial year can find some financial light at the end of the tax tunnel with cost segregation and having this property broken down further into categories and uses. This works best when a company has taken advantage of a remodel, like a hotel that upgraded several rooms over the last tax year and regenerates cash flow into the business. Being able to use an asset for a large tax break and generate more cash flow into the business, both bonus depreciation and cost segregation working together to maximize the overall tax benefits.
Maximizing Tax Benefits
The most significant benefit of cost segregation and bonus depreciation is the ability to reclassify assets and maximize the financial potential of purchases made for the business. These assets help the company for a shorter period than traditional assets do financially with standard depreciation. Still, this tax benefit can be the difference in keeping a business open for the upcoming year. Businesses can secure a much larger tax break early on, incentivizing even the smallest businesses to move forward and continue building the company.
Even with the depreciation of these assets helping the business immediately, they can still be utilized for the next few years to continue adding to the tax benefits, even though the depreciation rate is lower. This continues that path of tax benefits going into the next few years. How these assets are related to the business and the property can further increase the tax benefits, allowing the same asset to cover multiple tax breaks in the same year through cost segregation.
Utilize a Tax Professional
To maximize your tax benefits through bonus depreciation and cost segregation, you’ll need assistance from tax professionals who know and understand how these two practices work with the IRS. If they aren’t listed right or appropriately filed with the correct tax forms, you could be audited and have to resubmit your taxes for 2024.
At CSSI, we have a team of experts ready to assist you through this process and ensure you take advantage of all the tax benefits you’re eligible for. Contact us today for more information.