Whether you work from home or own a large company, there are inevitable costs associated with getting set up. For a small-scale jeweler, set-up costs could include a state-of-the-art 3-D printer and gemstone setting tools. For someone who has a home office, basic equipment would include the purchase of a computer, cell phone, printer, and possibly a small photocopy machine. When this work-related property is expected to last for longer than one year, the deduction you can claim is normally spread over several years. Read about the 2020 rules for bonus depreciation and how this could help your return come tax time.
Understanding Depreciation and Bonus Depreciation
Usually, the deduction you can claim for a work-related piece of property is calculated in terms of depreciation. Depreciation means that the original price of the asset is divided by the years that the asset is expected to last and is reduced by this amount each year. With bonus depreciation in 2020, the total value of the asset can be claimed as a deduction all at once.
Take this example: Ananda purchased a $30,000 automatic encapsulation machine for his herbal supplement business, and the machine has a lifespan of 20 years. Under normal circumstances, Ananda can only claim $1,500 in the first year as a tax deduction, which at a tax rate of 24% would represent a mere $360 back on his investment. Under the current bonus depreciation rules, Ananda can claim all of the encapsulator’s value in the first year, getting back $7,200 immediately.
Rates of Bonus Depreciation Prior to 2020
With the frequent introduction and renewal of tax laws, bonus depreciation rules are constantly changing. That’s why it’s important to understand where bonus depreciation comes from and which of the bonus depreciation rates applies in 2020.
The Job Creation and Worker Assistance Act of 2002
The concept of bonus depreciation was initially established in 2002 to stimulate business investment through the Job Creation and Worker Assistance Act. When it was established, companies were allowed to claim 30% of the value of an asset in the year it was purchased.
The Jobs and Growth Tax Relief Reconciliation Act of 2003
The following year, the rate was raised to 50% as part of the 2003 Jobs and Growth Tax Relief Reconciliation Act. It applied to assets placed into service before January 1, 2005. This same rate for bonus depreciation was offered again in 2008 and extended several times until 2017.
The Tax Cuts and Jobs Act of 2018
With the Tax Cuts and Jobs Act of 2018, the 50% rate of bonus depreciation set in 2008 was raised to 100% for property put into service after September 27, 2017, and before January 1, 2023. This is still the relevant bonus depreciation rate for 2020 and is set to drop to 80% for 2013, 60% in 2024, 40% in 2025, and 20% in 2026.
Assets That Are Eligible for the 2020 Bonus Depreciation Rate
As mentioned above, the assets eligible for 100% bonus depreciation have to have been put into service after September 27, 2017, and before January 1, 2023. What this means is that the property must have been made available for use by yourself or others in the company between these dates — whether or not the property was actually used.
If an asset that you purchased in a given year wasn’t shipped to you until the following calendar year, this capital expense must be claimed in the year it arrived and was put into use.
These are some of the additional requirements for claiming the 100% 2020 bonus depreciation rate:
- The property cannot have been used by the business before it was acquired.
- The property cannot have been acquired from another company in the same controlled group of corporations.
- The cost of used property acquired cannot be figured by the tax basis of the asset in the hands of the seller or the deceased person who owned the asset previously.
- The cost of used property acquired cannot be based on the tax basis of an asset it is intended to replace (in the case of a like-kind exchange).
What About Second-Hand Assets?
In the past, only brand-new assets were eligible for bonus depreciation. The 2018 law allows taxpayers to take advantage of the 2020 bonus depreciation rate for second-hand as well as new assets.
Does the Offer Apply to Vehicles?
Vehicles used for business purposes are classified as “listed property” under the Tax Cuts and Jobs Act of 2018. That means that the vehicle must be used for business purposes at least 50% of the time to qualify for bonus depreciation rules. Prior to 2018, computers were also classified as “listed property” but were taken off this restricted list as part of the Tax Cuts and Jobs Act. The assets that are currently considered “listed property” include:
- Passenger automobiles
- Other transportation vehicles (excluding excepted vehicles)
- Recreational equipment, including cameras, video cameras, and voice recorders
- Computers and peripherals that are not used at a place of work or as part of a home office
Property Purchased from Relatives
Finally, bonus depreciation rules in 2020 cannot be applied to any asset that was purchased or received from a related party. This rule exists to prevent family gifts and inherited assets from being claimable as a tax deduction for business purposes.
Optimize Your Tax Return with ML&R Wealth Management
Depending on multiple factors in your tax return, it may be advantageous to claim the 2020 bonus depreciation rate. Eliminate doubt and receive the healthiest return possible by consulting the team at ML&R Wealth Management. Since 1997, we have been helping taxpayers in Austin, Texas to maximize their investments and minimize unnecessary taxes. Contact us to schedule your free initial consultation!