Maximize Your Tax Savings with Bonus Depreciation and Cost Segregation: A Guide for Business Owners

As a business owner, you are always looking for ways to reduce your tax liability and maximize your tax savings. One way to do this is by using tax incentives such as bonus depreciation and cost segregation.

What is Bonus Depreciation?

Bonus depreciation is a tax incentive that allows businesses to write off a portion of the cost of new or used assets in the year they are placed into service. This tax break is designed to stimulate economic growth by incentivizing businesses to invest in new equipment and machinery. Currently, the bonus depreciation has been reduced to 80% in 2023.

What is Cost Segregation?

Cost segregation is a tax strategy that enables businesses to accelerate the depreciation of assets by identifying and reclassifying personal property components of a building, such as electrical and HVAC systems, and deducting the cost of these assets over a shorter recovery period. By using cost segregation, businesses can reduce their tax liability and increase their tax savings.

Combining Bonus Depreciation and Cost Segregation

The two concepts are related because bonus depreciation can be combined with cost segregation to provide even greater tax savings. By using cost segregation, a business can identify and reclassify assets that qualify for bonus depreciation and deduct a portion of the cost of these assets in the year they are placed into service. This can result in substantial tax savings compared to traditional depreciation methods.

For example, a business that purchases a building and equipment for $2 million may be able to write off up to $1 million in bonus depreciation in the first year if the assets qualify. By using cost segregation, the business may reclassify some of the assets and write off a portion of the cost over a shorter recovery period, resulting in even greater tax savings.

Conclusion

Cost segregation and bonus depreciation are valuable tax strategies for businesses looking to reduce their tax liability and maximize their tax savings. By combining these two strategies, businesses can increase their tax savings even further, making it a valuable approach to consider in a high-interest-rate market.