Bonus Depreciation - A Tax Savings Tool
We all want tax deductions, and we want a lot of them! Deductions end up reducing the taxes you pay, but one aspect of these deductions changed substantially this year - the calculation of bonus depreciation. One of the celebrities of the new tax bill signed into law this year is 100% bonus depreciation. To illustrate the magic of bonus depreciation, let’s say you purchased a work truck for $50k on June 15, 2025. See the below table for the depreciation schedule with and without bonus.
| Year | 100% Bonus Depreciation | Standard Depreciation |
|---|---|---|
| 2025 | $50,000 | ~$10,000* |
| 2026 | $0 | ~$16,000 |
| 2027 | $0 | ~$9,600 |
| 2028 | $0 | ~$5,800 |
| 2029 | $0 | ~$5,800 |
| 2030 | $0 | ~$2,800* |
*Assuming half-year convention.
With a 30% marginal rate, that saves you $12k in taxes that first year! This rule generally applies to equipment, vehicles, and improvements, but does not include land and other real property. Let’s discuss this further.
What is depreciation?
Just because you spent money doesn’t mean you get an immediate tax deduction. That may sound odd, but this is the case for many asset costs businesses incur. Instead of deducting the entire cost of the asset in the year the money was spent, the entire cost of the asset gets pooled together and depreciated over IRS-mandated time periods. Every year, you get to take a portion of the total cost as a depreciation deduction. At the end of the mandated time period, you will have taken a deduction for the entire cost of the asset.
What is bonus depreciation?
Instead of having to parcel out the entire cost of the mandated time period, bonus depreciation is an exception that allows you to take a certain portion of the asset’s cost as a deduction whenever the asset was placed into service. There are various bonus depreciation percentages, ranging from 0-100% in 20% increments. With 80% bonus depreciation, for example, 80% of the cost can be deducted in the first year and the remaining 20% is depreciated over the mandated time period. KEY TAKEAWAY: With 100% bonus depreciation beginning January 19, 2025, the entire asset’s cost can be deducted in the first year.
Maximize your tax savings
The implementation of bonus depreciation can drastically reduce your tax bill by utilizing larger asset purchases as tax deductions. Timing of these purchases is crucial, however, as they need to be made within the year bonus is in place. You cannot buy an asset in 2026 and get a deduction for it in 2025.
This isn’t just a tax deduction; it’s a capital investment strategy. At Sonata, I combine both expert tax strategy along with thorough decision analysis to ensure you are making a decision that maximizes both your business growth and tax savings.
To leverage bonus depreciation, ask yourself:
Are we planning asset purchases this year (or early next year)?
Are these assets eligible for bonus depreciation (like equipment, not land)?
Have we forecasted our tax liability through the end of the year?
Common Questions I Hear
Does this apply to used assets? Yes, it applies to both new and used assets that you purchase.
Is there a limit to the bonus I can take? Nope! You can take however much bonus is calculated on the eligible assets.
Do I have to take bonus? No you don’t if it doesn’t bode well with your current situation. You can elect out by asset class.
What if I have a loss? If you have a loss, you can elect out of bonus for the year and take a portion of the asset deductions annually. Or, if you want to drive your potential Net Operating Loss further, you can still take bonus. Reach out to me if you’d like specific tax advice in this area.
How can Sonata help me in this area?
To best understand the benefits of bonus depreciation to your situation, some analysis needs to be performed of your expected tax liability and what options you have to utilize this extra deduction. At Sonata, I meticulously analyze your unique situation and can tailor these advantages to you. It’s almost the end of the year, so time iscrucial. Let’s discuss your big purchases now!
My number and email are always open. For Indianapolis clients - lunch is on me for an in-person discussion!