| Tax Talk: Bonus Depreciation |
| HURRY! Time is running about to take advantage of the 80% bonus depreciation for 2023! And that includes furnishings!! The U.S. government has introduced a tax incentive known as bonus depreciation to stimulate investment in new capital assets, such as buildings, equipment, or furnishings, for businesses across various sectors, including short-term rentals. This incentive allows businesses to deduct a substantial portion of the asset’s cost from their taxable income in the year it is put into service, as opposed to spreading the deduction over several years through conventional depreciation methods. Here’s a breakdown of how bonus depreciation operates in the context of short-term rentals: 1. Eligibility: To be eligible for bonus depreciation, the asset must meet specific criteria. It should be brand new, have a useful life of 20 years or less, and generally be depreciable under the Modified Accelerated Cost Recovery System (MACRS). 2. Percentage Deduction: The Tax Cuts and Jobs Act (TCJA) brought about a noteworthy change by elevating the bonus depreciation percentage for qualified property to 100% for assets placed in service between September 27, 2017, and December 31, 2022. This implies that you can deduct the entire cost of the eligible asset in the year it is put into service. However, starting in 2023, the bonus depreciation percentage is slated to gradually decrease as follows: 2022: 100% 2023: 80% for property entering service between December 31, 2022, and January 1, 2024 2024: 60% for property entering service between December 31, 2023, and January 1, 2025 2025: 40% for property entering service between December 31, 2024, and January 1, 2026 2026: 20% for property entering service between December 31, 2025, and January 1, 2027 3. Qualified Improvements: Short-term rental property owners can particularly benefit from bonus depreciation when making improvements or renovations to their rental units. Under the TCJA, qualified improvement property (QIP), which encompasses interior enhancements to non-residential real property like short-term rental units, also qualifies for bonus depreciation. This enables property owners to deduct the cost of these improvements in the year they are undertaken. 4. First-Year Expensing: In addition to bonus depreciation, the TCJA has raised the maximum amount that can be expensed in the first year according to Section 179 of the tax code. This is advantageous for smaller property enhancements and personal property items such as furnishings, as it permits a deduction up to a specified dollar limit in the year the property is put into service. 5. Impact on Tax Liability: By capitalizing on bonus depreciation and other tax incentives, property owners can significantly reduce their taxable income in the year of acquiring or improving short-term rental properties. This not only leads to lower tax liabilities but can also free up additional funds for future investments or operational expenses. Disclaimer: Not Tax Professionals – No Liability The information we provide is for informational purposes only and should not be considered as professional tax advice. We are not tax professionals, and our information may not be up-to-date or applicable to your specific situation. It is essential to consult with a qualified tax professional for accurate guidance. We disclaim liability for any consequences arising from reliance on our information. |
