The year-end is just around the corner, but there’s still time to make some tax-saving moves.
If you made any large purchases for your business this year, one strategy is to take advantage of depreciation. Two categories allow 100% depreciation to be taken in the year equipment and fixed assets are purchased or placed in service: Bonus and Section 179 expensing.
Bonus depreciation allows a business to deduct a large percentage of the purchase price of qualified equipment in the first year it was purchased or placed into service rather than extending that deprecation over the life of the equipment.
The good news is that purchases made in 2022 are eligible for 100% bonus deprecation. As it stands now, however, the deduction amount is scheduled to phase out over the next several years. Currently, the deduction amount reduces to 80% for assets placed in service beginning in 2023; 60% beginning in 2024; and continues to decrease until it is fully phased out in 2027.
As a result, if you are anticipating a higher tax bill this year, one solution may be to purchase needed equipment for your business that would qualify for bonus.
Qualified property is defined as tangible property with a recovery period of 20 years or less. This can be new and most used property equipment.
Bonus deprecation can also be used for qualified improvement property (QIP). This includes non-structural improvements made to the interior of an existing building. It does not include an enlargement to the building, the construction of any elevator or escalator, or changes to the internal structural framework of the building. Like bonus, depreciation on QIP is scheduled to sunset in 2027.
Section 179 expensing is a related option. Using this method, you can currently deduct up to $1.08 million with a $2.7 million phase-out threshold in 2022. Section 179 is available for furniture, fixtures and equipment; QIP; certain automobiles; roofs; and HVAC, fire protection, alarm and security systems.
It is important to note that taking Section 179 cannot create a loss, nor can it be taken if you are reporting a loss for the year. This is only allowed if you have taxable income. Also, please know that not every state allows for Section 179 expensing on state income taxes.
The 100% bonus and Section 179 depreciation can be valuable tax-saving strategies. If you are expecting a higher tax bill this year, you may want to consider purchasing needed equipment for your restaurant. Just remember that any qualified equipment or depreciable assets must actually be placed in service in 2022 to qualify for the 100% bonus or Section 179 depreciation. In other words, equipment that has been purchased but not actually received or used in 2022 would be considered “placed in service.” Equipment purchased and placed in service in the same year is not eligible for depreciation. Likewise, please let us know if you have any equipment that has not been fully paid for that will have been placed in service by December 31, 2022.
Please contact us if you have any questions.
Cameron Chambers is a Senior Accountant on our Client Services Team. He can be reached at email@example.com.