Posted on: September 8, 2022 | Investing
The Tax Cuts and Jobs Act (TCJA) of 2017 made some significant changes to the tax code. Some of these changes benefited business owners, including Ice House owners. The changes to how business owners could deduct equipment depreciation from their taxable income was significant. This portion of the TCJA is phasing out in the coming years. Here’s what business owners need to know about the Tax Cuts and Jobs Act in 2022.
Note: this post is not legal or financial advice. Always work with a tax professional to ensure that you are maximizing your tax deductions legally.
What Business Owners Need to Know About the Tax cuts and Jobs Act in 2022
The TCJA made some important changes to how equipment depreciation can be calculated on your taxes. In particular, there were significant changes to bonus depreciation. However, these changes weren’t permanent, and were set to phase out over several years. When you complete your taxes for 2022, there are some changes that you’ll need to know.
Utilizing depreciation on your taxes, you can save substantially on your new ice machine
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Why is Depreciation Important?
Depreciation not only makes it easier to account for and expense the cost and value of expensive equipment, but it also provides important tax advantages. Depreciation allows business owners to reduce their taxable income and thus reduce their tax burden.
With the ability to transfer depreciation amounts to different years would give business owners the ability to reduce their taxable income when it was most beneficial to them. This is one of the key things that business owners need to know about the Tax Cuts and Jobs Act in 2022 and how it has changed depreciation on taxes.
Depreciation and the Tax Cuts and Jobs Act in 2022
Bonus depreciation allows you to deduct more depreciation in a tax year. Bonus depreciation was first introduced in 2002 through the Job Creation and Worker Assistance Act. At first, businesses could deduct up to 30% of depreciation in addition to the standard depreciation. This legislation has developed over the years and the TCJA made another significant change to depreciation deductions.
The TCJA doubled the bonus depreciation deduction that business owners could take from 50% to 100%. So, businesses could turn their purchase into a tax deduction from their taxable income, reducing their tax burden substantially. This law began in 2018, and it is important for business owners to know that 2022 is the last year where they can take a 100% tax deduction using depreciation.
The bonus depreciation that business owners can deduct from their taxable income will lower at a steady rate over the next five years. For equipment purchased and brought into service from September 27, 2017 until January 1, 2023, business owners can use a 100% depreciation deduction. Afterwards, the potential for bonus depreciation will still be available, but at a smaller rate.
For equipment brought into service and effectively used during the following years, you can take advantage of the following bonus depreciation on your businesses taxes for that year.
- 2022: 100% bonus depreciation possible
- 2023: 80% bonus depreciation possible
- 2024: 60% bonus depreciation possible
- 2025: 40% bonus depreciation possible
- 2026: 20% bonus depreciation possible
How Can Business Owners Use Depreciation for 2022 Taxes?
So, what does this mean for business owners? It means that if you purchased equipment in 2022, you can maximize the amount of depreciation you can deduct from your taxable income. If you expect substantial taxable income from this year and you have the ability to finance a new investment, the remainder of 2022 will be the most advantageous time to purchase equipment, from a tax perspective. While it’s essential to consider the balance between your assets, debts, cash flow, and business growth, it’s also important to consider your tax strategy.
Let’s consider an example business owner who might purchase new equipment. If a business owner purchases new equipment totaling $150,000, they will be able to deduct 100% of the asset’s depreciation from their taxable income. At a 35% tax rate, this amounts to $52,500 in reduced taxes. Subtracting this savings from the original equipment cost, the equipment only costs $97,500. This means you save over a third of the equipment’s cost!
- New equipment cost: $150,000
- Tax savings at a 35% tax rate and 100% depreciation deduction: $52,500
- New equipment cost subtracting tax-savings: $97,500
With exceptional savings available to you, now is a great time to expand your business and explore your investments. If you are interested in investing in an ice vending machine, we can help. Explore the models available and contact us to learn more about expanding your business.
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