Discover Bonus Depreciation Benefits for Small Businesses

• admin
• February 21, 2025
• 6 min read

Understanding Bonus Depreciation Benefits for Business Growth

In the ever-evolving landscape of tax regulations, small business owners must stay informed to capitalize on opportunities that can bolster financial health. One such opportunity in 2025 is the strategic use of bonus depreciation benefits. This provision allows businesses to accelerate deductions on qualifying depreciable property, offering immediate tax savings and aiding in recovery and growth.

Key Takeaways

• Accelerated Deductions: In 2025, businesses can deduct 40% of the cost of eligible property upfront, significantly reducing taxable income.
• Strategic Planning Essential: With bonus depreciation phasing out by 2027, timely investments are crucial to maximize tax benefits.
• Section 179 Deduction: An alternative or complement to bonus depreciation, allowing immediate expensing of up to $1,250,000 in qualifying property for 2025.

Understanding Bonus Depreciation in 2025

Bonus depreciation enables businesses to deduct a substantial percentage of the cost of eligible assets in the year they are placed in service, rather than spreading the deduction over the asset’s useful life. This accelerated depreciation can lead to significant tax savings, improving cash flow and facilitating reinvestment into the business.

Phase-Out Schedule

The Tax Cuts and Jobs Act of 2017 introduced a 100% bonus depreciation rate, which has been decreasing by 20% annually since 2023. For assets placed in service in 2025, the bonus depreciation rate is 40%. This rate will continue to decline, reaching 20% in 2026 and phasing out entirely in 2027. Therefore, 2025 presents a critical window for businesses to take advantage of this diminishing benefit.

Qualifying Property

To be eligible for bonus depreciation in 2025, property must meet the following criteria:

• Type of Property: Tangible property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS), including machinery, equipment, computers, appliances, and furniture.
• Original Use: The property can be new or used but must be new to the taxpayer and placed in service during the 2025 tax year.
• Acquisition Requirements: The property must not be acquired from a related party or in certain tax-free transactions.

It’s important to note that certain property types, such as buildings and structural components, typically do not qualify unless specific improvements meet the criteria for qualified improvement property.

Section 179 Deduction: A Complementary Strategy

In addition to bonus depreciation, the Section 179 deduction allows businesses to elect to expense the full cost of qualifying property in the year it is placed in service, subject to annual limits. For tax years beginning in 2025, the maximum Section 179 expense deduction is $1,250,000, with a phase-out threshold of $3,130,000. This means that once total qualifying property purchases exceed $3,130,000, the deduction limit decreases dollar-for-dollar.

Strategic Considerations for Maximizing Bonus Depreciation in 2025

Timing of Purchases

• To fully leverage the 40% bonus depreciation rate in 2025, businesses must place qualified property in service before December 31, 2025.
• Any purchases made after this deadline will be subject to the reduced 20% rate in 2026 before the benefit phases out entirely in 2027.
• Key Action: If you’re considering purchasing equipment, vehicles, or other qualifying assets, doing so in 2025 will yield the highest depreciation deduction available in the coming years.

Combining Section 179 and Bonus Depreciation

• Section 179 deduction allows businesses to immediately expense up to $1,250,000 of qualifying property.
• If a business exceeds the Section 179 deduction limit or taxable income limitations, it can then apply bonus depreciation to the remaining balance.
• Example: If a business buys $1.5 million in equipment, it can deduct $1.25 million under Section 179 and apply the 40% bonus depreciation to the remaining $250,000.

Understanding Taxable Income Limitations

• Bonus depreciation is not limited by taxable income, meaning it can create or increase a net operating loss (NOL).
• However, Section 179 deductions cannot exceed the business’s taxable income, making bonus depreciation a more flexible option for businesses with lower profits or losses in a given year.
• Key Takeaway: If your business has limited taxable income, using bonus depreciation instead of Section 179 might provide greater tax advantages.

State Tax Implications

• Not all states conform to federal bonus depreciation rules, which can lead to differences between federal and state taxable income.
• Some states limit or disallow bonus depreciation, requiring businesses to depreciate assets over multiple years instead.
• Action Step: Check with your state tax agency or a tax professional to understand how your state treats bonus depreciation and whether adjustments will be necessary when filing state taxes.

Unlocking Growth Through Strategic Tax Planning

Navigating the complexities of tax incentives like bonus depreciation requires careful planning and informed decision-making. For small businesses aiming to recover and grow in 2025, understanding these opportunities is crucial. For more information on managing your business taxes and extensions, visit FileLater.