DEPRECIATION

Depreciation is simply decrease in value of the assets, for tax, can be a meaningful deduction to take advantage of. It is a non-cash item, not part of cash flow calculation, however, it is significant to consider when calculating Taxable Income.

OUR SERVICES AND WHAT WE CAN HELP WITH

General Depreciation Advice & Planning: We can advise on the correct depreciation methods (e.g., straight-line vs. accelerated), asset classification, useful life determinations, and proper tax filings, including identifying the types of assets eligible for depreciation, such as machinery, equipment, buildings, and vehicles, and cost segregation studies.
Section 179 Expensing: We can advise on the eligibility criteria for taking a Section 179 deduction, including limits on the amount and types of property, strategic timing for asset purchases to maximize Section 179 deductions in a given tax year.
Bonus Depreciation: We can advise on the provisions of bonus depreciation, including any recent changes due to legislation (like the Tax Cuts and Jobs Act) and the phase-out schedule and how bonus depreciation can provide significant upfront tax savings for businesses acquiring qualifying assets.
Repair v. Capitalization issues: We can provide guidance on whether expenses should be capitalized (and depreciated) or deducted as repairs in the current year, including detailed analysis of IRS regulations and often applies to property improvements, equipment, or machinery.
Compliance and Documentation: We can assist with record-keeping and advise on maintaining thorough records for asset purchases, depreciation schedules, and any changes in asset usage or valuation.
Handling Depreciation Recapture. We can advise on tax implications of sale where depreciation recapture rules come into play when a depreciated asset is sold, including how it is taxed as ordinary income, and we can strategize on the timing and structure of asset sales to minimize recapture taxes.
Industry-Specific Considerations: We can assist with guidance on depreciation of real estate, including residential vs. commercial property and handling improvements.
Audit Preparedness: We can prepare clients for potential IRS audits related to depreciation deductions, ensuring they have the necessary documentation and rationale.
Representing Clients: We can represent clients during audits or disputes regarding depreciation claims and provide guidance on correcting any identified issues.

SECTION 179

Immediate write off of all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service can be an option as a 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions throughout the years.

In short, qualifying property has to meet certain eligibility requirements, and it has to be acquired for business use. Property you acquire only for the production of income, such as investment property, rental property, and property that produces royalties, does not qualify.

Please note that dollar limitations may apply to the entity and individual owners separately. In other words, for example, dollar limitation is fine at partnership lever, but then disallowed to be carried forward at the individual level. Also, the deduction limits apply to an S corporation and to each shareholder. The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits.

BONUS

Bonus or additional first year depreciation deduction provided by section 168(k) is a tax break or tax incentive to accelerate depreciation on qualified property. Tax Cuts and Jobs Act (TCJA) increased provision for bonus for 2022 tax year at 100%, 2023 tax year at 80%, 2024 tax year at 60%, 2025 tax year at 40%, 2026 tax year at 20%, and 2027 tax year at 0.

In the past, bonus only applied to new qualified property. Now, qualified property to include used depreciable property.

ELECTING OUT OF BONUS

Because bonus is mandatory, taxpayer may elect out of if for the taxable year the property is placed in service by filing statement by the due date, including extensions, of the Federal tax return for the taxable year in which the qualified property is placed in service by the taxpayer.

Please note it applies to all qualified property that is in the same class of property and placed in service by the taxpayer in the same taxable year.

DEPRECIATION RECAPTURE

When you sell or dispose of the property that you depreciated, there are rules that require taxpayer to characterize some or all of the gain as ordinary v. capital.

It is designed to disallow double benefit where taxpayer already took ordinary deduction in the form of depreciation. For example, if a business purchased $1,000 equipment and immediately wrote it off at $1,000, it took advantage of ordinary deduction of $1,000. Now, let's say in a few years, that piece of equipment is being sold at $500, full $500 gain needs to be recaptured and treated as ordinary income not capital because of that ordinary depreciation deduction taken in the year of purchase.

NEXT STEPS

Our attorney can assist with evaluating and optimizing your options.

tax law is complex. tax attorney will aim to find solutions.