Bonus depreciation – when is the right time to elect out of it?

By: Dave Herbe, CPA- Senior Accountant

Bonus depreciation (or as we tax geeks refer to it- Section 168 depreciation) can be a very beneficial thing for most businesses. Bonus depreciation can be taken on new assets placed in service in the current tax year. Bonus depreciation allows for an accelerated deduction of 50% of the assets original cost. This can lower your taxable income by a significant amount and save on taxes. However, there are some instances when electing out of bonus depreciation makes sense.

One of the biggest factors of electing out of bonus depreciation would be whether or not your company plans to make money for the year. If you are forecasting a loss for the current year, it may make sense to elect out of bonus. The reason that it makes sense is that in future years if you expect to be back in an income position, you can defer the depreciation expense into future tax years to help offset that income with additional depreciation expense. If you were to take the bonus depreciation in the year of the loss, it would only increase your loss and the benefit of the depreciation expense would be diminished in future years.

The entity type of the business also comes into play when determining if you should elect out of bonus depreciation or not. As a C-Corp there could be different impacts on your tax return versus that of a flow through entity (s-corps and partnerships). The impact on a flow through entity would be determined at the individual level. With individual returns, there could be factors from outside investments or income separate from the business entity that would go into determining if you should be electing out of bonus depreciation for qualifying assets.

This is a huge tax planning tool that can lead to significant tax dollar savings. The Holbrook and Manter tax team is very knowledgeable on this subject matter and can assist in any tax planning areas that you may need. Please contact us today.