What Section 168K of the Tax Cuts and Jobs Act May Mean for You
By Liza Long
With COVID-19 disruptions, including supply chain shortages and workforce challenges, many small businesses have struggled to make ends meet. But one feature of the 2017 Tax Cuts and Jobs Act (TCJA) may work in your favor: Bonus depreciation.
Depreciation has long been used by business owners and their tax professionals to offset the cost of capital investments such as retail or restaurant equipment (usually 7 years), computers (5 years), or land/landscaping improvements (15 years). But Section 168K of the TCJA has an important provision that expires at the end of 2022. Under this provision, small business owners can use bonus depreciation to deduct 100% of these costs in a single tax year. Next year, the amount drops to 80% and eventually phases out completely.
Before we get too far into the weeds, I want to stress that you should not try this strategy alone—and I am not a tax professional. You’ll need a competent tax professional to help you navigate the potential risks and benefits of using Section 168K bonus depreciation to offset your business profits.
I sat down with Susan Langley, a certified public accountant and partner at Coles Reinstein Accounting and Consulting in Boise, to learn more about how Section 168K bonus depreciation can work for Idaho businesses. Langley immediately noted that because Idaho does not follow the federal rules for depreciation, Cole Reinstein only uses this provision in rare cases.
“Let’s say you take a 100% accelerated depreciation for a $10,000 expense,” Langley said. “Idaho will add this amount back into your profits and calculate your depreciation using regular, not accelerated, rates, so while you may be able to deduct the full amount on your federal return, you’ll only be able to deduct a few thousand dollars on your state return, with depreciation spread out over the next 5-7 years.”
Essentially, Langley, said, this means that business owners will need to track the asset depreciation differently for their federal and state returns, which can create a problem if they change accountants or attorneys.
Idaho now has a 6% income tax rate, while the top federal rate is 37%. For lower tax bracket clients, a bonus depreciation may not make as much sense as it does for higher federal tax-rate clients. Additionally, Langley stressed, business owners will need to consider the administrative nuisance of keeping two sets of books to track the asset depreciation.
So when does Section 168K bonus depreciation make sense? According to Langley, “You really need an expert to evaluate your personal situation.”
Under Section 179 of the U.S. Tax Code, business owners can already write off assets up to $1 million at 100%. However, Section 168K has a few advantages over Section 179.
For example, a business owner cannot claim a Section 179 depreciation if the business has a net loss, but with Section 168K bonus depreciation, business owners can deduct the asset depreciation amount in full even if the business is showing a loss.
Langley gave me one hypothetical example where Section 168K bonus depreciation can dramatically reduce a client’s tax bill. If someone owns several businesses, and one business shows a large profit that places the client in the highest tax bracket, another less profitable business can use bonus depreciation to offset the taxes that would otherwise be owed on the profits from the first company. For example, one client was running a successful multimillion dollar business and opened a retail store with high up- front capital expenses. The bonus depreciation of the retail store expenses was used to offset taxes on the other business’s profits.
“The thinking behind this provision was to help small business owners with taxes while also boosting the economy,” Langley said, noting that while Section 168K was originally limited to new equipment, it can now be used for used equipment as well.
And in 2022, small business owners can use all the help they can get! The bottom line is this: If you own a business, talk to your tax professional to see if bonus depreciation is right for you.
Disclaimer: Nothing in this article should be construed as investment or legal advice. For advice specific to your situation, contact a tax professional.
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Pull Quote: “The bottom line is this: Talk to your tax professional to see if bonus depreciation is right for you.”