Introduction
Small business owners frequently encounter the burden of substantial upfront costs for essential equipment, compounded by tax implications that can diminish profitability if not managed effectively. Inexperienced tax preparers may overlook accelerated depreciation opportunities, resulting in deferred deductions and increased current tax liabilities. Are you capitalizing on the reinstated 100% bonus depreciation to offset these investments?
At Kewal Krishan & Co, our expert tax advisors assist clients in achieving an average annual savings of $50,000, which may accumulate to $1 million over a decade through strategic depreciation planning. This blog elucidates the benefits of bonus depreciation under Internal Revenue Code (IRC) § 168(k) for 2025, with detailed examples and compliance steps to maximize savings on new equipment. Reinstated to 100% for qualified property acquired and placed in service after January 19, 2025, this provision enables immediate expensing, enhancing cash flow. Initiate your savings strategy now with insights from Our Tax Planning Services.wipfli.com+2 more
Understanding Bonus Depreciation in 2025
Bonus depreciation, authorized under IRC § 168(k), permits businesses to deduct 100% of the cost of qualified property in the year placed in service, rather than over the asset’s useful life. For 2025, this applies to new or used depreciable property with a recovery period of 20 years or less, such as machinery, vehicles, and computers, acquired after January 19, 2025.
Qualified property excludes real estate improvements and certain intangibles. The deduction is claimed on Form 4562, attached to entity returns like Form 1120 (corporations) or Form 1065 (partnerships). Phaseout thresholds apply for excess property over $3.05 million (adjusted for inflation), reducing the deduction by $1 for every $1 over the limit.
This reinstatement enhances incentives for capital investment, as detailed in IRS Publication 946.irs.gov
Key Eligibility Criteria
Acquisition Date: After January 19, 2025, and before January 1, 2030.
Placed in Service: In 2025 for full benefit.
Business Use: Over 50%; personal use portion ineligible.
Detailed Example: Maximizing Savings with Bonus Depreciation
Consider a manufacturing firm purchasing $200,000 in new machinery on February 15, 2025, placed in service immediately. Under IRC § 168(k), the firm deducts the full $200,000 as bonus depreciation.
Assuming a 21% corporate tax rate (IRC § 11), this yields $42,000 in tax savings. Without bonus depreciation, using MACRS over 5 years (20% first-year), the deduction is $40,000, saving only $8,400—deferring the remainder.
For a sole proprietor in the 37% bracket: Full deduction saves $74,000 versus $14,800 under standard MACRS.
Alternative Scenario
If purchases exceed the $3.05 million phaseout threshold by $100,000, bonus depreciation reduces by $100,000, to $100,000 deductible, with the balance depreciated normally.
Step-by-Step Guide for Taxpayer Compliance
To claim bonus depreciation and ensure IRS compliance, adhere to these steps:
- Verify Qualification: Confirm property meets IRC § 168(k) criteria, including acquisition after January 19, 2025.
- Document Purchase: Retain invoices showing cost, acquisition date, and business use percentage per IRC § 6001.
- Elect if Needed: Bonus is automatic; opt out on Form 4562 if beneficial (e.g., for state conformity).
- Calculate Deduction: Deduct 100% of adjusted basis after any Section 179 expensing on Form 4562.
- File Returns: Attach Form 4562 to Form 1040 (individuals), 1120 (corporations), or 1065 (partnerships) by April 15, 2026, or extend with Form 4868/7004.
- Track Basis: Reduce basis by the deduction for future depreciation or disposition.
- Monitor Phaseout: Adjust for investments exceeding $3.05 million threshold.
- Retain Records: Maintain documentation for three years post-filing.
For equipment financing nuances, consult Our Business Tax Services.
Common Pitfalls to Avoid
Missing Acquisition Window: Property before January 20, 2025, ineligible for 100% rate.wipfli.com
Improper Use Allocation: Deduct only business portion; mixed use requires apportionment (IRC § 168(k)).
State Non-Conformity: Some states decouple from federal bonus; verify CA/NY rules.
Phaseout Oversight: Exceeding thresholds without adjustment disallows portions.
Why Work with a Tax Expert?
Depreciation rules are intricate, and suboptimal elections can defer savings unnecessarily. Generic preparers may miss reinstatement details or phaseouts, reducing benefits. Kewal Krishan & Co ensures accurate claims under IRC § 168(k), integrating with Section 179 for maximum deductions. Our approach is highlighted in Our Tax Litigation Services.
Conclusion
Bonus depreciation at 100% in 2025 under IRC § 168(k) offers substantial savings on new equipment, accelerating deductions and improving liquidity. With proper qualification and documentation, businesses can significantly lower tax liabilities. Capitalize on this provision before year-end to bolster your financial strategy.
Call to Action
Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to leverage bonus depreciation.
About Our CPA
Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.
Disclaimer
This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.
FAQs
What is bonus depreciation in 2025?
100% deduction for qualified property acquired after January 19, 2025 (IRC § 168(k)).
2. What property qualifies?
Depreciable assets with ≤20-year life, like machinery, if business use >50%.
3. How to claim it?
On Form 4562 attached to your return; automatic unless opted out.
4. Is there a phaseout?
Yes, for property over $3.05 million threshold.
5. Can I combine with Section 179?
Yes, but bonus applies after Section 179 expensing.