The 100% First Year Depreciation Tax Deduction

An important incentive for business owners within the Tax Cuts and Jobs Act was the 100% First Year Depreciation Deduction. If you have purchased property with a recovery period of 20 years or less such as machinery, equipment, appliances, and computers, then you will want to evaluate the benefits of writing off the full depreciation immediately instead of spacing it out over time. 

 But, isn’t doing it over time the same as lumping it all in one year? Not necessarily — consider these two examples:

Let’s assume that revenue for 2021 is greater than most years and will probably go back down next year. It may be more beneficial to reduce your taxable income in 2021 with 100% depreciation rather than spreading depreciation out in years that will have a lower tax liability. 

This will result in a greater depreciation deduction. Let’s say you buy a $1,000,000 commercial building and you begin depreciating it straight line over 39 years (normal). However, included in your new building purchase are appliances, computers, TVs, etc. that are eligible for accelerated depreciation. Instead of lumping it all under the 39-year depreciation schedule, you can segregate and depreciate some items more quickly.

If you have been putting off the purchase of new equipment, be sure to have your tax professional evaluate the true cost by offsetting the cost of the equipment with the tax savings you would receive in that same year.

Atomic Habits

By: James Clear