2024 Bonus Depreciation Update: Is It Coming Back?

2024 Bonus Depreciation Update: Is It Coming Back?

In 2024, there have been some changes to the bonus depreciation rules.

One notable development is the passage of the Tax Relief for American Families and Workers Act of 2024, which includes a 100% bonus depreciation provision and research and development expensing and expands the Child Tax Credit.

Remember that the taxable year deadline may impact your ability to claim bonus depreciation, so staying informed and planning is vital.

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How Does Depreciation Work in Real Estate?

Before discussing bonus depreciation, let’s start with a review of real estate depreciation

The IRS gives depreciation, which allows real estate investors to write off property over time.

This is due to the wear and tear of the property.

Currently, investors can use deductions from depreciation annually from pre-tax income to recover the cost basis of a property over the calendar years of ownership.

3 Types of depreciation

In real estate, there are three types of depreciation:

#1. Straight-line depreciation

The IRS allows residential rental property owners to depreciate their property over 27.5 years.

For example, the annual depreciation expense of a single-family rental home with a value of $220,000 would be $8,000 ($220,000/27.5 = $8,000).

#2. Accelerated depreciation

Accelerated depreciation is the second type. An engineering group is hired to perform a cost segregation study to utilize this. 

Want to use the group I personally use to perform cost seg studies? Click HERE.

This type of depreciation allows different building components to be depreciated over shorter time schedules of 5, 7, and 15 years by identifying all the non-structural elements along + any land improvements.

For instance, a cost segregation study identifies components, such as appliances, as having a 5-year useful life vs 27.5 years as most don’t last that long.

Accelerated depreciation creates larger paper losses in the early years the property is owned, which gives the investor more depreciation benefit upfront.

This is especially good for the passive investor as many real estate syndication deals (i.e., RV Parks) have a 5-7 year hold time.

#3. Bonus depreciation

The third type of depreciation in real estate is bonus depreciation, which allows a taxpayer to front-load the depreciation even more.

By utilizing this, investors and business owners are allowed to depreciate items with less than a 20-year life immediately in the first year.

That’s how it helps real estate investors.

For business owners, bonus depreciation allows them to deduct a significant portion of the cost of eligible assets upfront rather than writing them off incrementally over their useful life.

Established by the Internal Revenue Code Section 168(k), this tax incentive has undergone several changes in recent years.

Bonus depreciation phase-out

In 2023, the bonus depreciation rate was reduced to 80%. However, starting in 2024, the rate will drop to 60%. It will continue to decrease by 20% each year until it’s entirely phased out in 2027 unless Congress passes the Tax Relief Act previously mentioned. 

For example, if your company purchases a $200,000 piece of equipment and places it in service during 2024, you can claim a bonus depreciation deduction of $120,000 (60% of $200,000).

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How Bonus Depreciation Works

One of the main reasons Congress developed bonus depreciation was to stimulate the economy as it spurs growth and, more importantly, taxes.

It encourages business owners to purchase assets as they can accelerate depreciation to write off MORE of the cost in the year they began using it.

Here are 3 steps to take advantage of bonus depreciation:

#1. Purchase qualified business property

This includes:

  • Qualified improvement property – includes improvements to interiors of “nonresidential real property” (i.e., commercial building), as long as the improvement is made after the building is open for business.
  • Property with a useful life of 20 years or less. Examples include equipment, vehicles, furniture, fixtures, and machinery. As a side note, this doesn’t include buildings or land.

  • Computer software

  • Some listed property. This includes property, such as vehicles, that tends to be used for business and personal use. To qualify for bonus depreciation, it has to be used for business at least 50% of the time.

#2. Place property in service

This means you must start using the asset in your business.

For example, if you’re an orthodontist and purchase a new x-ray machine in December 2022 but don’t start using it until January 2023, you’d have to wait until you file your 2023 tax return to claim bonus depreciation.

#3. Claim bonus depreciation on your tax return

You can write off up to 100% of the asset’s cost on Form 4562, which gets filed along with your business tax return.

Tax Relief for Business Owners and American Families

The “Tax Relief for American Families and Workers Act of 2024” introduces new tax legislation that aims to provide substantial tax relief for both business owners and American families by offering a 100% bonus depreciation.

This encourages economic growth and investment, benefiting both entrepreneurs and ordinary citizens.

Here are some of the key benefits that you can expect:

Benefit Description
Increased Investments in Assets Businesses are incentivized to purchase qualifying property, maximizing deductions and tax savings.
Boosted Cash Flow Increased deductions improve cash flow, enabling capital expenditure and expansion.
Tax Savings for Families The tax relief package reduces the tax burden on American families, encouraging more savings and investments.

Frequently Asked Questions

What is 100% Bonus Depreciation and How Does It Benefit Small Businesses?

100% bonus depreciation is a significant provision under the current tax code that allows businesses to deduct the total amount of the purchase price of qualified assets in the year they are placed into service rather than depreciating the cost over several taxable years. This tax incentive is part of broader tax cuts designed to stimulate business investment in the United States.

For small businesses, this can mean an immediate deduction of the cost of eligible property, such as new equipment, office furniture, and security systems, up to a certain deduction limit. This first-year bonus depreciation applies to a specific class of property and is aimed at reducing businesses’ taxable income, thereby lowering their tax liability for the calendar year in which the assets are purchased and used for business purposes.

Special rules may apply, including the phase-out threshold and the maximum section deduction limit, which are determined by the tax code and may be subject to adjustments in future years.

How is bonus depreciation calculated for assets acquired in 2024?

To calculate bonus depreciation for assets acquired and placed in service in 2024, follow these steps:

  1. Subtract any Section 179 expense from the original cost for the year.
  2. Reduce the basis by the applicable percentage of any credits claimed (such as the energy credit).
  3. Multiply the bonus rate for 2024 (60%) by the remaining cost of the asset.

What types of property are eligible for bonus depreciation in 2024?

Eligible assets for bonus depreciation include most depreciable business assets with a recovery period of 20 years or less, such as machinery, equipment, computers, and furniture. However, the property must meet four requirements:

  1. It must be qualified property.
  2. The property should have a recovery period of 20 years or less.
  3. The property must be placed in service by the taxpayer during the tax year.
  4. The original use of the property must commence with the taxpayer.

Are there specific requirements for vehicle deductions under bonus depreciation for the year 2024?

The requirements for vehicle deductions under bonus depreciation in 2024 are to be determined.

As the tax laws and regulations continue to evolve, it’s essential to consult a tax professional for the most up-to-date information pertaining to vehicle deductions for your specific situation.

What is the maximum bonus depreciation percentage available in 2024?

In 2024, the maximum bonus depreciation percentage will be 60%. This rate will continue to decrease by 20% per year until it is completely phased out in 2027, unless Congress takes action to extend it.

How does the phase-out of bonus depreciation impact tax planning for businesses in 2024?

As the bonus depreciation rates decrease each year, businesses must plan their investments in depreciable assets carefully to maximize their deductions.

The 60% rate in 2024 would lead to lower deductions compared to previous years. Therefore, businesses should consider the declining bonus depreciation rates when forecasting their tax liabilities and creating long-term tax strategies.

Is there a cap on the amount of bonus depreciation that can be claimed in 2024?

There is no specific cap on the amount of bonus depreciation that can be claimed in 2024. However, businesses should be aware of any limitations that might apply to their particular situation.

These limitations include annual income limitations for Section 179 expense deductions. It is always important to consult with a tax professional or accountant to ensure that you are maximizing your deductions in compliance with current tax laws.