Depreciation is the reduction of value of an asset over time. And we all know most things lose their worth as soon as you take a look at them; for these assets, it’s typical that businesses are able to claim tax deductions thanks in part due to depreciation – which they refer back to on occasion when claiming certain losses through business activities.
Bonus depreciation is a tax benefit that allows you to write off a larger portion of the cost of your property in the year you purchase it. The TCJA increased the bonus depreciation percentage from 50% to 100%, which means you can now write off the entire cost of your property in the year of purchase.
And because bonus depreciation applies to both new and used properties, it’s now available to a much wider range of investors. In the past, bonus depreciation was only available for new properties. But under the new rules, you can get the benefit as long as you didn’t already own the property on September 27, 2017.
Here’s an example to show you how bonus depreciation works. Let’s say you purchase a rental property for $1 million. In a non-bonus year, you would depreciate the property over 27.5 years, which would give you a deduction of $36,364 in the first year ($1 million x 3.6%).
But if you purchase the property in a bonus year, you can write off the entire cost of the property in the first year. So instead of a deduction of $36,364 in the first year, your deduction would be $1 million.
If you have K-1 income, bonus depreciation can have a massive impact on your taxes. That’s because K-1 income is taxed at your personal tax rate, which could be as high as 37%. So if you have $100,000 of K-1 income and you’re in the 37% tax bracket, your tax bill would be $37,000.
But if you’re able to take advantage of bonus depreciation, you could reduce your K-1 income and lower your tax bill. In our example above, if you were able to write off the entire cost of the property in the first year, your K-1 income would be reduced by $1 million. And that would result in a savings of $370,000 in taxes.
So if you have K-1 income, bonus depreciation could be a huge benefit for you. But there are a few things to keep in mind. First, bonus depreciation only applies to properties that are used for business purposes. So if you have a rental property that you also use as a personal residence, you won’t be able to take advantage of the deduction.
Second, bonus depreciation is only available for a limited time. The rules are scheduled to expire at the end of 2022. So if you’re thinking about taking advantage of the deduction, you need to do it before the end of the year.
Finally, it’s important to remember that bonus depreciation is a tax deduction, not a tax credit. So it’s only going to reduce your taxable income, not your tax bill. But if you have K-1 income, it can still have a big impact on your taxes.
If you have any questions, be sure to speak with a qualified tax professional. They can help you determine if bonus depreciation is right for you and show you how to maximize the deduction.
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