The Tax Cuts and Job Act, which was signed into law back in December 2017, has many incentives for small business owners. One of the big advantages includes increased depreciation benefits. Keep reading to learn about the 3 key depreciation perks you need to know about.

1. Bonus Depreciation

Tax reform increased bonus depreciation from 50% to 100% for property placed in service after September 27, 2017. But it begins to phase out next year in 2023! Generally, bonus depreciation applies to personal property, such as furniture and equipment. Both new and used property qualifies for the deduction.

To elect out of bonus depreciation you have to do so on an asset class basis and must attach an election statement. The bonus depreciation begins to phase out in 2023:

• 80 percent for property placed in service during calendar year 2023
• 60 percent for property placed in service during calendar year 2024
• 40 percent for property placed in service during calendar year 2025
• 20 percent for property placed in service during calendar year 2026

Be careful when claiming bonus depreciation when you cannot fully utilize the deduction because your business is in a loss situation.

2. Section 179

Tax reform doubled the Section 179 limit from $500,000 to $1 million in 2018 and beyond for qualified property. The annual phase-out threshold based on investment has increased from $2 million to $2.5 million.

The Section 179 deduction allows for more flexibility than bonus depreciation because you’re able to pick and choose the assets and amounts versus an all-or-nothing approach required of bonus depreciation (per asset class). But remember, the 179 deduction is limited to business income and is recaptured if the business use percentage drops below 50 percent.

Qualified real property eligible for Section 179 was expanded to include personal property used predominantly to furnish lodging. For example, this includes beds, furniture, appliances, roofs, HVAC property, fire protection, alarm systems and security systems. To qualify, these items must be placed in service after the business property was placed in service.

3. Luxury Auto Limits

Another huge gift was the automobile depreciation limits, which have almost been tripled under the new tax law. As a reminder, the word “luxury” applies to almost all four-wheeled vehicles that drive on public roads and weigh less than 6,000 lbs.

Below are the auto limits for the 2022 tax year. Remember to add $8,000 to the first-year amounts when bonus depreciation is taken.

Any depreciation that is not allowed because of these annual limitations is allowed once the vehicle reaches the end of the depreciation schedule but is still subject to certain limits:

• $11,200 year one
• $18,000 year two
• $10,800 year three
• $6,460 years four through six

There are different depreciation guidelines for business vehicles weighing more than 6,000 lbs, so be sure to check in with your accountant!

Small business owners should also consider whether to buy or lease the automobile.  Leased vehicles are not depreciated, but instead you can deduct the lease payment itself. When the value of the leased vehicle is above a certain amount, you need to subtract an “income inclusion” amount, which is intended to equalize the tax benefits from leasing and owning business vehicles.

Candace is the founder of NewWay Accounting and is a CPA who specializes in working with fellow entrepreneurs. She strives to take the fear and anxiety out of taxes and help empower small business owners to feel more confident and in control of their finances.