Bonus Depreciation

100% Bonus Depreciation Ends 12/31/22

Since we’re nearing the end of the year, business owners everywhere are looking for ways to save tax dollars. One of those ways is purchasing needed equipment or vehicles. If you NEED to replace equipment or a business vehicle, by all means, get it done before the end of 2022. Here’s why!

100% Bonus Depreciation is Ending

Since the Tax Cuts and Jobs Act of 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property (other than real property). Starting January 1, 2023, bonus depreciation is scheduled to decline 20 percent each year until it reaches zero in 2027. 

For example, if you purchase $150,000 in equipment for your business and place it in service [key detail] in 2022, you can deduct $150,000 using 100 percent bonus depreciation. If you wait until January 1, 2023, you’ll be able to deduct only $120,000 (80 percent). Don’t get me wrong, 80% bonus depreciation ain’t a bad deal. It’s just not 100%. 

bonus depreciation

Cue the music for buying the G-Wagon! *insert smirk here* If there is any piece of influencer tax advice that irks my soul, it’s the ‘buy the G-Wagon’ advice.

It’s incomplete advice. Here’s how it works: 

Let’s assume that on or before December 31, 2022, your business buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck, and has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This new, or new to you,  purchased vehicle gives you four benefits: 

  • The ability to elect bonus depreciation of 100 percent
  • The ability to select Section 179 expensing of up to $27,000
  • MACRS depreciation using the five-year table 
  • No luxury limits on vehicle depreciation deductions

Example. On or before December 31, 2022, you buy your coveted G Wagon, a qualifying vehicle, and place it in service (use it for business purposes). The “cheap” G-Wagon SUV is $131,000, for which you can claim 100 percent business use. Your business cost is $131,000. Your maximum write-off for 2022 is $131,000.

And the crowd goes wiiiilllldddd!!! 


Bonus Depreciation doesn’t mean free

When people hear this way cool tax advice, they make two unfortunate assumptions. 

  1. The government is giving you a ‘free’ car. 
  2. People also assume that the value of the car is a dollar-for-dollar reduction of the tax liability. 

Neither of these is true. 

You still gotta pay for the car. 

No matter how you slice it, you must still pay for the car. It doesn’t matter if you pay cash for it, or if you have a loan. You may have been able to deduct the total cost on your tax return, which sounds sexy. You still have to settle up with whoever you’re purchasing the car from. The loan payments aren’t tax deductible either, only the interest paid on the loan. 


Bonus Depreciation is not a tax credit

Story: I had a client call me and tell me she was going to buy a vehicle that qualified for bonus depreciation. The vehicle was $90,000. She assumed that her tax bill ($123,000) would be reduced by $90,000, consistent with being a tax credit. I explained that purchasing the vehicle would reduce her profit by $90,000, which reduced her taxable income. The purchase would reduce her tax bill by approximately $30,000. 

If she had gone through with the purchase, she would have had to pay $90,000 for the vehicle, and still have to pay the remaining $93,000 tax bill ($183,000 out of pocket).

In the G-Wagon example, the vehicle would save you approximately $39,000 in taxes. You would end up paying $131,000 to save $39.000. That math ain’t mathin’ for me. You should purchase a vehicle or any business equipment, because when you need it, with the tax break being the bonus, not just to get a tax break. 

Bonus Depreciation Fine Print

Since I know someone is going to be rushing out to buy a vehicle by the end of the year just to save on taxes, here’s the fine print you need to know.
-If you sell or trade the car before the end of its useful life (5 years), you have to pay tax on the depreciated amount (recapture), and it’s taxed as ordinary income.

-There is this teeny issue with the vehicle being an ordinary and necessary expense. Deductions are a matter of legislative grace. That means the government can disallow the deduction of an expense they deem is not ordinary or necessary. 

-You can’t depreciate the vehicle AND take the standard mileage

-Vehicle must be used for at least 50% of business purpose

End-of-Year Tax Savings

By all means, do what you can to benefit your business and life, and as a result, lower your tax bill. That doesn’t mean you need to buy unnecessary things just because bonus depreciation is going away.