Ep. 102 | Bonus Depreciation Explained
Download MP3Welcome back to the Teaching Tax Full podcast, everybody. Today, episode 102, we're gonna dive into bonus depreciation explained. But as always, let's take a brief moment and thank our episode sponsor.
Ad Read:Hi. Chris Picciurro here, founder of Teaching Tax Flow, co host of the Teaching Tax Flow podcast, and pickleball enthusiast. Yes. If you listen to the podcast, you know almost every episode we talk about pickleball, the most popular and growing sport in America. We have tons of opportunities for paddles and and pickleballs, but we don't have a lot of great gear on the market.
Ad Read:Well, I'm so excited to announce that Sunsets and Dink's are now a sponsor of the Teaching Tax Slow podcast and produce amazing gear, not only to look at, but you feel confident on the court. Because you are part of the Teaching Tax Slow community, you get a 15% discount on all your orders with them. I know I love the gear I received and I have quite a good record while wearing it, believe it or not, even at my level. Go to teaching tax flow.com backslash pickleball, and simply enter t t f 15 in the serve up promo code area of your paddle rack.
John Tripolsky:We are loving life in the triple digits, by the way, if you can't tell that we're a little more excited about this than usual. And speaking of things that we are excited about but heck, let's be honest. I don't even know all the details to this one. That's why we brought back this guy who, yeah, some people might say he has a, a voice or a face for radio, but I disagree. I think he's pretty handsome.
John Tripolsky:Chris Paciro. What's happening, buddy?
Chris Picciurro:Johnny t. Great to be back. First of all, before I get started, bonus depreciation, one of the top 5 asked questions in the teaching tax flow community. But before we get started, for those of you watching on YouTube, congratulations, you found our YouTube channel. Secondly, you will notice I always wear our TTF gear, but this week, I'm wearing something different.
Chris Picciurro:My Detroit Tigers are on fire. It's been a decade since we've been in the playoff hunt. And, John, I'm gonna tell you a little story. Real quick.
John Tripolsky:Yeah. Before you do that, though, where's your lucky Starbucks cup from last week? Oh. You didn't rip it out. It finally got cracked.
Chris Picciurro:We were together all week. And, you know, something about that cup you get from Starbucks and you get a water. And, yeah, I'm gonna have to go back to Starbucks and and order something the de minimis. Yeah, de minimis State Harbor election us accountants think about and get a cup. But I've got my Tiger jersey on because the Detroit Tigers are on fire.
Chris Picciurro:And little known fact, John, I was at a I've said this on the podcast before, but I was at a conference for a financial advising conference, and someone from Major League Baseball was speaking. And the person from Major League Baseball said that someone is more likely to change religions than change their favorite Major League Baseball team based on the age of 8 years old. So whoever your favorite team is at 8 years old versus your religious beliefs at 8 years old, you're more likely to change your religious beliefs as an adult than your favorite Major League Baseball team. Something about baseball and people that follow it. It's like that first love other than your parents, so I'm giddy with excitement.
Chris Picciurro:I don't know, John. You know, the we're if the Tigers make the playoffs, we might be cannonballing it up cannonballing it up from Nashville in a car to a game. I I don't know. Well, this is we're
John Tripolsky:talking about. Happy to have you back. And then, but on this topic, right, of of bonus depreciation. So let me give a little lay the ground for this one a little bit. For anybody that's listened to the podcast before, I would say watched the podcast before because we may not have talked about this a whole lot in the past couple episodes.
John Tripolsky:But whether watching or listening or both, hopefully both, so bonus depreciation. This topic comes up very, very often. Not because Chris, as you mentioned, in the community pages and various discussions. Right? I mean, even talking all the conferences that we go to, it always comes up.
John Tripolsky:Especially real estate specific. But even more so, I would probably wager bet that one out of every 3 podcasts that we do, bonus depreciation comes up in some way or another. So why I think this episode I mean, I'm really excited about this. Chris, I know we we discussed this last week and said, hey. You know what?
John Tripolsky:We need to do this topic, one specifically on what it is. Right? So bonus depreciation explained for the most part is that it's not sometimes people know what it does a little bit, but they don't know exactly what it is or where it derives from and the changes on it and all this stuff. Right? You've heard the 6,000 pound rule.
John Tripolsky:You've heard all this stuff. So let's dive into that. And maybe, Chris, I'll let you kinda start us off with maybe if we can just give a quote, unquote definition of it and then maybe talk through where it you know, I wouldn't even say where it rears you know, peaks its ugly little head up because it's not an ugly little head. It's a good looking head. You kinda like your face, buddy.
John Tripolsky:Well, thank
Chris Picciurro:you, Dan.
John Tripolsky:We enjoy we enjoy seeing it
Chris Picciurro:when it comes up. So I appreciate that. Well, bonus depreciation if you wanna get really fan sassy. You can go look at IRS code section 168 k, and that lays out what it is. Let's take a step back before we move forward.
Chris Picciurro:Let's remember there are 3 laws of teaching tax flow. One of the laws is that tax agencies are your involuntary business partner. That means that tax laws are written to encourage or discourage certain behavior. That behavior could be economic. That behavior could be social.
Chris Picciurro:Whatever it is, laws are written to encourage and discourage certain behavior. So the this law tax law is written to encourage businesses to invest in fixed assets and with the belief that that'll keep our economy going in a forward direction. Okay? So that's that's kind of the genesis of bonus depreciation, and it really helps out that small business owner. The small business owners, as we know, are really the backbone of our economy.
Chris Picciurro:So bonus depreciation ultimately is a tax incentive that allows businesses to deduct a large percentage of cost of qualifying property in the year the property is placed in the service. So what that means, John, is let's say that you purchase a something, a fixed asset. Okay? And let's say it's let's say, it's furniture and fixture or and let's say that that fixed asset so whenever you buy a fixed asset, meaning it has what's called a a useful life of over a year, the IRS requires you to deduct the cost of that over either a 5, 7, or 15 year period. K.
Chris Picciurro:Those are or if it's real estate, residential real estate, 27a half, commercial, 39. So if you have a 7 year asset, even if you pay cash or if you finance it, you're still deducting the cost of that asset over 7 years under what's called something called MACRS, modified accelerated cost recovery system. Oh, second rule of teaching tax flow, cash flow and tax flow are different. Meaning, remember, it doesn't matter if you finance some an asset purchase or you pay cash, that has no effect on your depreciation deduction. That's a that's a common misnomer.
Chris Picciurro:So if you buy qualifying property, so fixed asset, and you have to, in my example, write it off or deduct it over a 7 year period, without bonus depreciation, what happens is that cost is spread out over 7 years. Now it's not it's not that type of asset is not what we call straight line. Under MACRS, like I said, modified accelerated cost recovery system, the deduction is front loaded because what IRS is saying is we know that asset loses a majority of its value in the 1st few years, so we're gonna give you a higher deduction amount in the 1st few years where real estate is straight line, meaning it's the same deduction every year. So you buy a fixed asset. Alright.
Chris Picciurro:So, John, you you know, we know you like to sling the sling a saw around and and equipment. And let's say you had a business where you were a contractor and you went and bought a bunch of equipment for your business. You know, could be a could be a I don't know. Come up with something that's, like, $10. I'm sure you you you're well Planer.
Chris Picciurro:Industrial sized planer. That planer was is probably a 5 or 7 year asset. But under bonus depreciation, what the IRS allows you to do, it's really Congress, what the Federal Government allows you to do, we're talking bonus depreciation on the Federal side, pin that. There is each State is different as far as its conformity, So not all states conform with the federal bonus depreciation deduction, and that could be that's something to consider, especially if you're in a higher tax state. Let's go back.
Chris Picciurro:So what that allows you to bonus appreciation allows you to do, it allows you to take a percentage of that asset purchase front loaded. So if you purchase that a piece of equipment for $10,000 and we are in 2024 right now, right now our bonus depreciation percentage under the Tax Cuts and Jobs Act is 60%. So, John, in your example, you would get a $6,000 immediate deduction for the purchase of that whatever the heck you said. What was it called? I'm sorry.
Chris Picciurro:A planer. A planer. Okay. Your planer, you get $6,000 deduction, and then the remaining $4,000 of asset purchase gets spread out over the useful life, either 5 or 7 years, just like it would have if we didn't have bonus depreciation. So bonus depreciation allows you to front load a percentage of the asset purchase into the 1st year and spread the remaining amount over the life of the asset.
Chris Picciurro:So you get that immediate deduction or front load it.
John Tripolsky:And then, Chris, before we dive into some some of the examples too of where people see this, right, like some of the topics we've hit on, you know, over the past 100 plus episodes, I know we're gonna get the question from this. And we we've seen it come up in some way, shape, or form. I know what it's called. But what is it called when, you know, say you buy say you buy a piece of equipment. Right?
John Tripolsky:Mhmm. And it normally what is it? 10 years?
Chris Picciurro:It's like a normal depreciation spot. 5 or 7 years on on equipment.
John Tripolsky:So let's say let's say 5 years. So we'll just let's call it 5 years just for conversation. So say I buy a piece of equipment. We'll call it $1,000. So over the course of 5 years, get, you know, good amount, good amount back, you know, depreciation over time.
John Tripolsky:But you front load it with bonus. Mhmm. And 6 months down the road or we'll say a year, year and a half down the road, like, you know what? I don't need this anymore. I'm gonna get rid of it.
John Tripolsky:Or real estate, same thing. You buy it, so you flip it. Walk us through that, recapturing.
Chris Picciurro:Sure. So first of all,
John Tripolsky:which by the way, I love knowing when something's called because it makes me feel smart. As everybody knows here, I am not a tax guy. So when I do, I'm like, oh, I know I know what's going on here. I'd feel so smart. It's called osmosis.
John Tripolsky:Hanging out with hang out with smarter, better looking people and, you know, sometimes you get a little bit.
Chris Picciurro:Wow. We appreciate that, and so does your circle of your your very small circle of friends. Anyway, we we, so before I answer the question, the tax pros listening right now are gonna cringe and say, John, $1,000? Why didn't you use the de minimis safe harbor election? So in general, if you buy a fixed asset of $25100 or less, you don't even have to, what we call, set it up for depreciation.
Chris Picciurro:You could just expense it using the de minimis safe harbor election, which might be another podcast. Guess what? You could find a complete mini lesson, 5 to 7 minute lesson just on that in our YouTube channel. Okay. That's about that that's enough of being, self promoting here.
Chris Picciurro:He put Chris put me
John Tripolsky:back in my corner right when I said it. I'm like, dang it. I knew the answer to something. He's like, but No. No.
John Tripolsky:You can you don't
Chris Picciurro:you don't have to make the safe harbor election, but it would be practical to do so. So in your example, let's say it was $1,000 and you front load it. It depend it really depends because if you buy and sell it in the same year, you're not gonna probably not gonna depreciate it. But let's pretend it straddles a year. For year 1, you you buy it and you take a 60% bonus depreciation deduction.
Chris Picciurro:So you bought it for $1,000, you get a 60% bonus depreciation that's $600. Let's say you get an additional $100 the year you bought it. So you basically paid $1,000, year 1, you deducted $700. So your tax basis or for people listening, your cost basis. You hear tax people say, what's your cost basis?
Chris Picciurro:And you're like, oh, no. No. I paid a $1,000 for it. It the your tax basis or your tax cost basis is is is a confusing term, but your cost basis for tax purposes is $300 right now, John. If you went and traded that in for $500, you would pay tax on $200, and that's depreciation recapture.
Chris Picciurro:Any depreciation deduction you take, if it's bonus or if it's straight line or or makers, as I'd already let's just call it normal depreciation, is always recaptured when you sell an asset. Now if you use the asset until it's doesn't have any use left and it's worthless and then you dispose of it, then you wouldn't have depreciation recaptured. So if you do sell an asset that you have depreciation on, you would have a recapture calculation. Now the one, that's where 1031 exchanges come in. So 1031 exchange allows you to not pay tax on the depreciation recapture, but with the Tax Cuts and Jobs Act, the 1031 exchange rules change.
Chris Picciurro:Actually, John, previously, you could 1031 exchange a, a vehicle for another vehicle. You know? Because it was like kind. But now 1031 exchanges are only for real estate assets. I didn't tell that.
Chris Picciurro:It was a company. Yeah. We have other content on that. So keep in mind, taking the bonus depreciation, if you dispose of the property in the future, it would there would be some depreciation recapture. That said, in general, especially if you're a red diagnosis in the teaching tax flow system, you are in a higher marginal tax rate, you do want to take those deductions in that higher marginal tax rate year and recover some of the money that you that you are deserved.
Chris Picciurro:So you do get that immediate deduction on bonus depreciation. You could potentially now this is pretty advanced. You could elect out of bonus depreciation. You could elect out of a portion of bonus depreciation, meaning for one of your asset classes. So this podcast, we we really don't wanna get too deep into the weeds if you're listening to this and you have a tax professional you're working with.
Chris Picciurro:If you have assets that you placed in the service in a year, what you have to figure out is it doesn't make sense for me to take advantage of the bonus depreciation. By default, you have bonus depreciation, or should I it'll elect out of the bonus depreciation, or should I elect out of a portion of the bonus depreciation, meaning one of the asset classes? So, John, let's say I own a business and I have 5, 7, or 15 year asset class property that is eligible for bonus depreciation in a given year, I can actually elect out of the 5 year property and take the bonus appreciation just on the 7 of 15 year. Again, that's an advanced tax planning strategy that it goes beyond the scope of just this podcast, but I want the listeners to understand bonus depreciation is like a tool that you don't have to you don't have to use it you can luck out of it if it makes sense and when would it make sense? If your marginal tax rate is in a if you're in a low marginal tax rate year meaning a green diagnosis in the teaching tax law system, and that deduction would benefit you in the future more than it would now.
John Tripolsky:And I'm glad we went over that, you know, bonus depreciation recapture specifically. Right? Because and I know it was going through some people's brain here at least to some extent if they're thinking like, well, I can buy something, and then I can front load the depreciation. So why can't I just sell it right away or just after a year and kinda keep doing it over and over and over again? And, you know, basically, at that point, it's tax avoidance that we, you know, we won't call it something else.
John Tripolsky:But without their recapture, right, the IRS would be looking at it as, you know, missing a huge opportunity because, literally, it's in there at 8. You know, revenue there. In Not that. Not profit.
Chris Picciurro:There are and you mentioned vehicles with gross weight of over £6,000 in general. We're not gonna go down that path in this episode. We have a whole another podcast just on the auto, automobile auto, and truck deduction. What I wanna mention on this pod this episode is this, if you have some type of vehicle that is eligible for bonus depreciation and you took the bonus depreciation, if you subsequently sell the vehicle or trade it in, trading it in as a sale, you would be subject to depreciation recapture. Or here's another very tricky one.
Chris Picciurro:Let's say you bought a truck that was an 80% business use. You're rolling around with it. You deducted all of it, and 4 years later, you think you want a new truck. Well, you're just thinking, oh, I don't want to I don't want I don't wanna trade it in. I don't wanna pay tax on that, so I'm gonna buy another one.
Chris Picciurro:I'm gonna let my spouse start driving this other truck around. Guess what? If your business use percentage goes below a 50%, you could you would have depreciation recapture just for lack of business use. Again, very technical. We talk to your tax professional when you're making these larger purchases and and determining and planning.
Chris Picciurro:This is a tax planning show. Bonus depreciation is an amazing tax planning tool. You just wanna make sure you use it. And just like any tool, if you don't use it right,
John Tripolsky:you can hurt yourself. Hey. That's a good, good deal. We were just talking about a planer. If anybody knows what that is, if you misuse that, you're you're gonna be, yeah, you'll be paying your insurance deductible at the hospital real quick.
John Tripolsky:Oh. Chris, going through this too, you know what I just thought about is I mean, I don't know. I don't even remember the last time that this term came out of my mouth, but depreciation schedule. Like, I know we talk about like, is that just like a term that's kind of not as popular these days? Or maybe, you know, walk through that.
John Tripolsky:Because I know again, kind of our I'm thinking generally here. You know, that's a term that I feel like I heard a lot more about before I was more involved in the tax world. And now that I heard them, I really don't hear about it too much.
Chris Picciurro:Well, what a depreciation schedule, some people call it a fixed asset schedule. What that is is it's it's it's gonna be an it's gonna be an attachment to your tax return. And if you use a professional tax preparer, make sure you get your depreciation schedule or fixed asset schedule. A lot of times, tax preparers don't put the depreciation schedule with the tax tree, which I think is silly. What that does is the schedule determines what your deduction is for the life of the vehicle and it lists all of your current fixed assets that are in use.
Chris Picciurro:So for instance, you buy the planer for $10 it's gonna live on your fixed asset schedule or depreciation schedule until the planer is not useful anymore or you dispose of it. The schedule reports to the IRS and to you and it keeps track of how much of the how much so think about it like this, John. You've got buckets. Right? That first bucket you're gonna see is depreciate bonus depreciation.
Chris Picciurro:You buy a fixed asset, are you taking bonus depreciation? Okay, there's one bucket. Number 2, are you taking what's called Section 179 deduction? Which we will have another another piece of content on that and we have some great YouTube, information on that. Then 3rd, if it doesn't fit into those first two buckets, then it goes through the normal depreciation deduction, either if it's less than 20 year asset makers, which I've already mentioned, or if it's a real estate asset, it goes straight line.
Chris Picciurro:Okay? So that's that's what a depreciation schedule is, And and I'm gonna dovetail that into our final topic when we talk about bonus depreciation is how the Tax Cuts and Jobs Act really changed the bonus depreciation deduction. Probably the reason you haven't heard of the or depreciation schedules is because due to the Tax Cuts and Jobs Act, from 2017 to 2022, so when the asset is placed into service. So from September 27, 2017 all the way till the till 12/31/2022, any fixed eligible fixed assets so we gotta remember, eligible fixed assets, it could be new or used property. So you could buy used whatever the loader or whatever the heck you're you remind me of planar.
John Tripolsky:Good planar. Yeah.
Chris Picciurro:It's new to you. Even though someone else used it, you could still use bonus depreciation. So you have eligible property. Any eligible property, you would receive a 100% bonus depreciation. Now that's after 2022, each year after that, the bonus depreciation deduction is reduced by 20%.
Chris Picciurro:So for 2023, 80%. 24, where we're in now, 60%. 25, it's scheduled to go to 40. 202620, and then in 2027, the bonus depreciation ends. We will have a ton of content around the election, and one of the hot button topics is going to be the extension of bonus depreciation because there's a lot of interested parties and bipartisan support that wants bonus depreciation extended.
Chris Picciurro:Okay? So if bonus depreciation extended, then the schedule that I just laid out for you of phased what we call phasedown schedule, is is superseded.
John Tripolsky:And then, Chris, I I know we only have a couple more minutes here, and then we do need to kick off. But so you did mention something there about new to you. So and I don't know the answer to this one. So has it historically been you've you had to purchase a new asset, like new equipment? Or could you also, as you mentioned for that time period there, purchase a used one?
Chris Picciurro:Well, no. The with bonus depreciation, the nice thing is is it's as long as it's new to you, and there are some related party transaction rules. But if it's new to you, then it would be eligible for bonus depreciation. So it could be a used to be you know, it could be a used vehicle, could be a used piece of equipment, and that's where we find a lot of opportunity when we're working with people in the teaching tax flow community. When you're buying a business, let's say let's say you're buying the assets of a business.
Chris Picciurro:We're gonna hope we're gonna work, if you're the buyer, to allocate as much legally and ethically possible to the fixed assets because you get bonus depreciation. With goodwill, you have to amortize that over 15 years. So, John, if I was buying a business from you for $2,000,000, you had a bunch of equipment in goodwill, I want the value of the equipment to be high because whatever I pay for your goodwill, I'm gonna have to deduct over 15 years. So that's that's kinda one of those things. Now I'm gonna wrap up with a couple other considerations and and because a lot a lot of the stuff we've talked about in other episodes.
Chris Picciurro:So, yeah, go back to number 1 and start from scratch. If you if this is your first episode, welcome. But, yeah, before, you know, the Tax Cuts and Jobs Act, we couldn't apply bonus depreciation to real estate. So now we can, and that's why cost segregation studies have gone through the roof with, both on the commercial side and on the, you know, the the residential side. Because you've got on the commercial side what's called qualified improvement property, which is 15 year property, and that was always well, that's always well for bonus depreciation, and that's huge.
Chris Picciurro:I mean, there's, for instance, like car washes, and you're seeing tons of car washes come up because a lot of them are 15 year qualified improvement property eligible for bonus depreciation. So, yeah, those are some of the things to consider. The thing I wanna wrap on to wrap up on is this, remember when we're talking about the asset, the underlying asset that gives you bonus depreciation, the most important date is the date the asset is placed into service. So if you bought your piece of equipment and you're running around on New Year's Eve like a Yahoo and say, I'm gonna go buy this, you know, this planer for $10 at Home Depot to get my get my deduction. No.
Chris Picciurro:Don't let the tax tail wag the dog. We hope that you need this equipment. I'm gonna buy and I'm gonna make sure I pay for it on December 31st, and you do. And Home Depot says, I don't even know if you could buy a planer at Home Depot, but they say, sorry, John. We're out of it.
Chris Picciurro:We will have that delivered to your home, or your office, or your, you know, wherever, your workplace on January 5th next year. That property, even if you paid for it, is not eligible for bonus depreciation because it was not placed in the service in that year. So the year the asset was placed in the service is very, very important.
John Tripolsky:Hey. And as as we wrap that up, I I would almost if there's anybody listening or watching this show that's an auto dealer, or an automotive dealer, there's a marketing campaign for you that you'll stay open until midnight on December 31st for those business owners that need to take delivery of their vehicle. Right? Because, yeah, like you mentioned, it's not like you can order it or, oh, I I put a deposit down on something, and I'll pick it up after the holiday. It doesn't work that way.
John Tripolsky:So I'm glad we I'm glad we covered that. So I think I mean, for me, Chris, I think the biggest things that I took away from this conversation again I know the topic I know enough to be dangerous is, you know, obviously, it needs to be placed into service, but then also that depreciation schedule that theoretically has well, not theoretically, has not gone away. It's just something that we may not have seen so much. But then also, you know, what really qualifies for this and, you know, this coming up here, selection time. So things things might change, which hint hint, we have a lot of good conversations coming up around that.
Chris Picciurro:Yes. And and I and then I'm gonna wrap on this. One, the reason you may have not seen this when your depreciation schedules is because every fixed asset purchased by a small business owner got a 100% bonus depreciation anyway. That said, you should still have a fixed asset or depreciation schedule. And the other thing is you did ask a question that I now that I'm thinking about it, I didn't answer, that that new to you property.
Chris Picciurro:Right? The used used equipment, but it's new to the to the business owner before the Tax Cuts and Jobs Act, bonus depreciation was only available to new equipment to the first owner. TCJA opened that up and expanded the bonus depreciation deduction.
John Tripolsky:So everybody's selling things and buying equipment off Facebook Marketplace? There's your answer. So not that, you know, that happened to me or not anything, but I would like to sell on my wife's Halloween decor because it's getting a little out of control. Anyways, on that topic, not specifically, but semi related, thank you for joining us here on the Teaching Tech Flow podcast. We will see everybody back here again next week as we dive into some great, great topics as we start to kinda, unfortunately, if you're into the winter months, the snow is likely coming.
John Tripolsky:I hate to say it. In Michigan, all the leaves are falling, so it's getting a little chillier. So as we wrap up the year, we will try to warm things up with some great topics for you here on the podcast. So be sure to subscribe And, obviously, share with your friends, share with your colleagues, heck, share with your tax professional some of these things. But, I mean, I say this not in a bad way at all, but maybe you have more questions than answers by listening to some of these shows, and that's perfectly fine.
John Tripolsky:That's great. You know, we're here to clarify, simplify, and get everything out there. I mean, remember this about TTF, teaching tax flow. We are the voice of tax planning, which means we don't always have the answers right away. We need the questions from you as the listener and as our community.
John Tripolsky:So send us those questions, and we'll do the best job possible to answer those for you. And I'll tell you, I don't have all the answers. That's why we bring this other guy along to the show. So we'll see everybody back here again next week. Thanks for joining us.
Disclaimer:The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment adviser. Securities are offered through Cabin Securities, a registered broker dealer.
Disclaimer:The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum and you should carefully examine the risk factors and other information contained in the memorandum.
