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Why Do Some Businesses Choose Not To Claim Bonus Depreciation?

Federal law allows for 100% bonus depreciation through 2022 on certain business assets. This means you can deduct 100% of the cost right away instead of depreciating the cost over several years.

There are several tax reasons to elect to not claim the 100% bonus depreciation. Here are a few:

  1. If you have net operating losses, it may be best to use these first.

  2. By claiming bonus depreciation you may end up at a loss. For estimated tax purposes, corporations can not base their taxes on a prior year which reported losses. So it may be beneficial to have a little amount of income to base next year’s estimated taxes on.

  3. If you are in a low tax rate and are likely to be at higher tax rates in future years, it may be better to claim depreciation over several years as these deductions will offset income at higher tax rates.

There are several non-tax reasons to elect to not claim the 100% bonus depreciation. Here are a few:

  1. Some partnerships base distributions on current year taxable income so partners prefer less depreciation deductions each year.

  2. Federal law allows bonus depreciation and some states (including California) do not allow bonus depreciation. For some taxpayers who file in multiple states, they do not want the burden of creating multiple state depreciation schedules so if bonus depreciation is not claimed, they can use Federal depreciation.

  3. Similarly, for larger businesses who follow U.S. generally accepted accounting principles (GAAP), some businesses do not want the burden of calculating deferred tax assets or liabilities on the difference between accounting depreciation (which does not allow bonus depreciation) and tax depreciation.

For assistance with depreciation tax planning, please contact me today.

Richard Pon CPA, CFP