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Tax credits are important for businesses aiming to maximize profitability and sustainable growth. Bonus depreciation is a key tax provision that has gained considerable attention. It enables companies to immediately deduct a large portion of the cost of eligible assets, such as machinery, equipment, and certain software, in the year they are placed in service. This accelerated depreciation schedule allows companies to reduce their taxable income in the short term, promoting long-term investments in new equipment and technology.
A financial advisor can help your business use tax credits to minimize taxable income and plan for future growth and investments.
Using bonus depreciation can be highly beneficial for businesses, as it allows them to immediately deduct a significant portion of the cost of new assets in the first year of use. This accelerates cost recovery, improves cash flow, and can provide more capital for reinvestment or other business needs. For example, the Tax Cuts and Jobs Act of 2017 allowed businesses to deduct 100% of the cost of eligible assets purchased and used between September 27, 2017, and January 1, 2023. This accelerated depreciation helps businesses recover their investment costs faster, improving cash flow and freeing up capital for additional investments.
While bonus depreciation can offer significant tax benefits, businesses should consider their long-term financial goals before applying it. Accelerating depreciation results in smaller deductions in future years, which may not be beneficial for companies anticipating higher profits. Additionally, not all assets qualify for bonus depreciation, so it’s important to consult with a financial advisor or tax consultant for compliance and to optimize tax strategies.
Bonus depreciation is gradually being phased out, impacting how businesses plan their capital expenditures. The phaseout schedule was established by the Tax Cuts and Jobs Act of 2017, which initially allowed for 100% bonus depreciation. This provision enabled businesses to immediately write off the full cost of eligible property, boosting cash flow and encouraging investment.
The bonus depreciation phaseout schedule is structured to gradually reduce the percentage of the deduction over several years. Starting in 2023, the bonus depreciation rate will decrease by 20% each year until it is completely phased out by 2027. Here is a detailed look at the phaseout schedule:
