Bonus depreciation can save you money on taxes related to the purchase of business assets, whether new or used. While it can be applied to a variety of tools and machinery used by your company, the substantial value of heavy equipment means understanding bonus depreciation in this context is especially important. Let's look at exactly what bonus depreciation is, recent changes that have influenced it and how to use it effectively to benefit your business.

What is bonus depreciation, and why is it important for my company?

Understanding a concept like bonus depreciation is easier when you start with a simple definition. Investopedia explained that bonus depreciation is a tax incentive. More specifically, the option gives businesses the power to deduct a large amount of the purchase value from their tax obligations quickly. This differs from a standard depreciation deduction, where organizations can only write off that same value much more slowly, over several years.

Depreciation write-offs are an option, not a requirement. A company could choose to not take a depreciation deduction on its taxes, but there are only rare situations where this is beneficial. In most situations, not taking this deduction means more money paid in taxes and a less-stable balance sheet. That can make it harder to do everything from securing a bank loan or private investment intended to grow your business to simply finding the funds to keep your doors open.

This tax deduction is a relatively recent concept, introduced by Congress as a tool for growing the economy in 2002 and re-introduced at various points since. Previously pegged at 50% of the asset's purchase value, new federal laws introduced in recent years raised the total deductible amount of bonus depreciation to 100%, attorney Stephen Fishman wrote for legal site NOLO. It's important to note that bonus depreciation isn't permanently enshrined in tax law. While it's available now and through 2022, the maximum deduction will slowly decrease in the years following until 2027. That could change with another new law passed in the future - a definite possibility, but not a guarantee.

The rule change also extended the bonus depreciation option to both new and used assets. Because purchasing or financing used heavy equipment is so common, this change is especially important.

Bonus depreciation is available for assets placed in service between Sept. 28, 2017 and Dec. 31, 2022, the IRS explained. Understanding exactly what this distinction means is critically important for getting the most out of this tax deduction. Attorney Fishman clarified the definition in his NOLO article, noting that assets must be ready to be used by your business to qualify. However, they don't have to be on the jobsite or at work within your office or other facilities. Essentially, a piece of heavy equipment sitting in a garage or other storage space will qualify if it's ready to go to work, even if it isn't used until the next tax or calendar year.

Making the most of bonus depreciation

This tax deduction option represents can help companies lower their overall tax obligations. Whether your business procures new or used equipment, it can take advantage of these recent developments to address financial burdens and improve the appearance of their balance sheets. Bonus depreciation is and will be - for at least the next several years - an important option to remember when managing your tax obligations or discussing them with your accountant.

While bonus depreciation is valuable, it isn't automatically the best choice for every organization's needs. Using the standard approach to depreciation, where the tax benefits are spread out across several years, may make more sense for your individual business goals. Understanding the value of each option and considering it in the context of your own budget, liabilities and other financial concerns, and discussing the choices with a tax professional, can help your business make the best decision possible.

Of course, to use bonus depreciation, you need to acquire an asset before any deductions can be made. Cat Financial is here to help you find cost-effective heavy equipment options for your business. To learn more about what we have to offer, from loans and leases that make acquiring new and used equipment more manageable to insurance and equipment protection plans, get in touch with us today.