Most of us are familiar with the concept of expensing an asset. However, if you are a business owner, it's beneficial for you to understand the method of depreciating your assets as well. 

This term refers to an accounting method used to allocate the cost of an asset over its useful life. Depreciating an asset calculates how much of it's value has been used. It also allows companies to earn revenue from the assets they own by paying for them over a period of time.

Some examples of commonly depreciated assets include vehicles, buildings, computers, machinery, patents, copyrights, etc.

Today, we are going to discuss two special provisions in the tax code: Section 179 and Bonus Depreciation.

Section 179

The annual amount of qualified assets that may be expensed (instead of
depreciated) was raised to $1.08 million for 2022. This benefit can be
maximized as long as the total assets purchased by your business don't
exceed $2.7 million. Qualified purchases can be new or used equipment, as
well as qualified software placed in service during the year.

Bonus Depreciation

There is also an option to choose additional first-year bonus depreciation of 100 percent of the cost of qualified property.

To qualify, the property must be purchased and placed in service before 2023. After that, an annual phaseout lowers the bonus deduction percentage. Property can be new or used, but it can't be in use by you before it was acquired. There are a few exclusions for electrical energy and gas or steam distribution.

Not interested in claiming the bonus depreciation expense? Then you may choose to opt out of this provision for each category (class) of property you place in service.

Expensing Vs. Depreciating- What Should You Do?

Taking advantage of these provisions may be good for your business, but that's not always the case.

Remember, if you use these special asset-expensing provisions, depreciation expense taken this year is given up in future years. How many future years depend on the recovery period of the asset, but the additional tax exposure could be up to two decades! This is especially important to consider if your company is organized as a passthrough entity, like an S-Corporation, as more income could be exposed to higher marginal taxes.

The short-term tax savings these two provisions provide is often too good to pass up. However, if you have some predictability in your business, it probably makes sense to forecast your projected pre-tax earnings with and without the accelerated depreciation to ensure you are making the correct long-term tax decision.

If you would like help determining whether expensing or depreciating one of your business' assets is more advantageous, click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

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