Take Advantage of 100% Bonus Depreciation While You Still Can

Depreciation is the relatively simple fundamental concept that as new things incur wear and tear, they become worth less and less over time. Leave it to the IRS to write rules and regulations to try to pin down exactly how different classes of items depreciate — and from a tax perspective only, as opposed to an overall market value standpoint.

Understanding this concept may seem arcane, but depreciation can be a powerful tax tool that can markedly improve the returns of certain investments. Today, we’ll look at how the depreciation benefit has recently been juiced — and how you can benefit from it.

What Is Depreciation?

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Depreciation is a tax break available to any business owner who buys property (all property, not just real estate) that isn’t used up in a single year. If you buy a laptop for your online survey-taking business, you can’t just write off the whole cost of the computer as a business expense in year 1. You have to depreciate it over its useful life span, taking some of the cost as a business expense in each year until its useful life span is over.

Since the life span of any given piece of property can be difficult to determine a priori, the IRS has provided some guidance. This guidance is called the Modified Accelerated Cost Recovery System (MACRS) and is found in IRS Publication 946, Appendix B.

As a general rule, depreciating something faster is a good thing, because you get your tax break much sooner. But if you use up all your tax breaks early on, you obviously won’t have them later too, so there are some situations where you would rather get the break later (especially if expect to be in a higher bracket later).

The basic formula for depreciation is to take the value of the asset, subtract out its “salvage value,” and then divide the rest by its useful life.

Methods of Depreciation

With that method, you basically take the purchase price of the depreciable property (let’s say you bought a rental house for $150,000 and determine the land is worth $30,000 and the salvage value of the building after 27.5 years is $20,000) and you divide it by 27.5 years.

Straight Line Depreciation

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