If you’re a business owner or a tax professional, you know that depreciation can be a valuable tool to reduce your tax liability. Depreciation is the gradual write-off of the cost of a business asset over its useful life. The IRS has rules that dictate how much you can depreciate in any given year. However, there are situations where you can take a special depreciation allowance to accelerate your depreciation deductions. In this blog post, we’ll go over the details of the special depreciation allowance and how it can benefit your business.
What is the Special Depreciation Allowance?
The special depreciation allowance is a tax deduction that allows businesses to write off a significant portion of the cost of certain qualified property in the year it is placed in service. The allowance is a bonus depreciation that is in addition to the regular depreciation that is allowed for the property.
To qualify for the special depreciation allowance, the property must be one of the following:
- Qualified reuse and recycle property
- Certain qualified property acquired after September 27, 2017
- Certain plants bearing fruits and nuts
How Much Can You Deduct?
The amount you can deduct for the special depreciation allowance depends on the percentage of the depreciable basis of the qualified property that is used for business purposes. The depreciable basis is the cost or other basis of the property multiplied by the percentage of business investment use. For example, if the property costs $100,000 and is used 80% for business purposes, the depreciable basis would be $80,000.
The applicable percentage for qualified property other than listed property is 100% for property placed in service before January 1, 2023. For listed property, the applicable percentage is 30%.
To calculate the special depreciation allowance, multiply the depreciable basis by the applicable percentage. For example, if the depreciable basis is $80,000 and the applicable percentage is 100%, the special depreciation allowance would be $80,000.
It’s important to note that any credits or deductions applicable to the property will reduce the depreciable basis. For example, if you took a Section 179 deduction or received any other credits or deductions related to the property, these would be considered adjustments to the depreciable basis.
Placing Property in Service in a Short Tax Year
If you place qualified property in service in a short tax year, you can take the full amount of the special depreciation allowance. This means that you can deduct the entire depreciable basis, regardless of the percentage of business use.
When it comes to taxes and deductions, it can be a lot to wrap your head around. Especially when it comes to depreciation, which is the method of spreading out the cost of an asset over its useful life. But what happens when you have a special depreciation allowance on top of that?
First, let’s define what a special depreciation allowance is. This is a type of deduction that allows businesses to deduct a larger portion of the cost of certain qualified property in the year it is placed in service. It is designed to encourage businesses to invest in new equipment and property.
So how do you calculate how much you can deduct? It all comes down to multiplying the depreciable basis of qualified reuse and recycle property, certain qualified property acquired after September 27, 2017, and certain plant bearing fruits and nuts by the applicable percentage for qualified property. For other than listed property, you would enter the special depreciation allowance on Form 4562, Part Two, Line 14. For qualified property that is listed property, you would enter it on Form 4562, Part Five, Line 25.
But what about cases where you have a partial personal use versus business use? In those cases, you would need to adjust the basis by multiplying it by the percentage of business use. This would reduce the depreciable basis of the property by the total amount of any credits and deductions applicable to the property. This includes any Section 179 deduction, any deduction for removal or barriers to the disabled and elderly, any disabled access credit, enhanced oil recovery credit, or credit for employer-provided childcare facilities and services. It would also include basis adjustments to investment credit property under Section 50 C of the Internal Revenue Code and Section 181 expense deduction.
Once you have figured out your special depreciation allowance, you can use the remaining costs to figure your regular makers depreciation deduction. This is where you would use normal depreciation methods, such as the Modified Accelerated Cost Recovery System (MACRS). To do this, you must reduce the depreciable basis of the property by the special depreciation allowance before figuring your regular makers depreciation deduction.
For example, if you placed qualified property in service in your business on July 1, 2020, that cost $450,000 and you did not elect to claim a Section 179 deduction, you would deduct 100% of the cost ($450,000) as a special depreciation allowance. If you have no remaining costs to figure a regular makers depreciation deduction for your property for 2022 and later years, then the special depreciation allowance completely wiped out the whole amount. This is a typical case for small businesses.
In conclusion, the special depreciation allowance is a great way for businesses to invest in new property and equipment while also taking advantage of deductions. While it can be a lot to understand, taking the time to properly calculate your deductions can save you money in the long run.