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Amortization is a cost recovery method used to deduct the cost of Section 197 intangible assets over a fixed period. In general, Section 197 intangibles are amortized over a 15-year period using the straight-line method—meaning that the same amount is deducted each year for 15 years. The most common intangible asset is goodwill on the purchase of a business but there are many others that we’ll talk about next. Section 197 Intangible Assets Intangible assets are property that you cannot see, touch, or feel—these include goodwill, copyrights, and patents and exclude any property that’s self-created. To the untrained eye, this type of property may not have any obvious value. However, most businesses own some type of intangible property—and the cost of this type of property can be deducted using amortization to create tax savings. Click on the following types of property that you typically can amortize: How To Calculate Amortization Amortization begins later in the month you purchased the intangible asset, or the month your business begins to generate revenue. To figure out your annual amortization expense, you need to divide the original cost of the asset by 15 years. A= Original Cost / 15 years The expense is claimed on Part VI of IRS Form 4562. If you have previously claimed bonus depreciation or Section 179, then you might already be pretty familiar with this form. How Amortization Affects Small Business Taxes The amortization deduction is an expense on your company's profit and loss (P&L) statement and a deduction on your company’s tax return. Your company’s amortization deduction will create a tax savings and, ultimately, lower your business’s taxable income. Where Amortization Is Reported Frequently Asked Questions (FAQs) Can amortization be used for tangible personal property? No, the process of amortization is used strictly for intangible assets, such as goodwill, copyrights, and patents. Tangible assets—such as office equipment, plumbing, or machinery—are subject to Section 179 and depreciation. What is the relation between business startup cost and amortization? Business startup costs are treated a little differently than intangible property. If your business is up and running, in the first year, you can deduct up to $5,000 as an expense. The remaining amount of your company’s startup cost is amortized over 15 years. What is the connection between amortization and loans? Amortization of loan payments and amortization of intangibles are unrelated even though they use the same term. While amortization is used in the tax world to spread the cost of intangible assets, it’s also the term used to separate loan payments into interest vs principal in the finance world. You can use Excel to create loan amortization schedules. Bottom Line Amortization is used on your company’s tax return when your business files Form 4562. If you own eligible property, you can use amortization to lower your company’s taxable income and increase your overall bottom line. Don’t miss out on this very valuable expense; identify the intangible property you own, amortize, and then deduct.

Percentage depletion is a tax provision that helps independent producers and royalty owners account for the reduction of a nonrenewable mineral resource, such as oil, gold, and iron, and to recover the associated cost. Another option for depletion is the cost depletion method. This deduction is very similar to depreciation but is specific to the natural resource industry. Who Qualifies for the Percentage Depletion Deduction Depletion can be claimed by individuals, corporations, estates, and trusts with an economic interest in an income-generating natural resource (except timber). If you possess any of the following types of economic interests, you may be eligible to take advantage of this extremely valuable tax saving tool. Royalty interest: A property interest that entitles the owner to receive a share in the production from the natural resource deposit Working interest: An investment interest where the investor is liable for the cost of production Net profit interest: A nonoperating interest where the investor shares in the gross income How To Calculate Percentage Depletion To figure out the percentage depletion deduction, you need to multiply the assigned depletion rate by your gross income from the property. In any year that you use percentage depletion, the total sum of the deduction cannot exceed 50% (100% for the oil and gas industry) of your taxable income. While the deduction has this limitation, it still leads to a huge tax savings. Let’s review a few percentage depletion rates and learn which rate may apply to you. Percentage Depletion Rates Example: Dan Conner owns a brick and tile clay mine. In 2022, the mine earned $100,000. In addition to his allowable business expenses and without regard for qualified business income deduction (QBID), Conner can claim a depletion deduction of $5,000 ($100,000 x .05) for the year 2022. Pros & Cons of Percentage Depletion Reporting the Depletion If you're ready to file your return and wondering where to report the depletion deduction, let’s take a look at the ways the deduction is reported and learn which one applies to you. Alternative To Percentage Depletion Cost depletion is another method used to figure out the depletion deduction. It allocates the cost of extracting natural resources and records the cost as an expense to lower your pretax income. If you mine timber, then you must use this method. All other natural resource producers and owners (including oil and gas) must use whichever method leads to the largest depletion deduction. Bottom Line If you’re a natural resource independent producer or royalty owner, you don’t want to miss out on this tax deduction. Percentage depletion can create huge tax savings and can provide an opportunity to increase your business cash flow.

For the 2022 tax year, Section 179 deduction allows business owners to deduct up to $1,080,000 ($1,160,000 for 2023) of the cost of qualifying new or used property, equipment, and vehicle purchases immediately. The advantage of the deduction is that you immediately receive the tax savings from an equipment purchase rather than gradually saving taxes through depreciation in future years. For example, under normal depreciation rules, the cost of a computer will be deducted over five years. The advantage of the Section 179 deduction is that the cost of the computer can be immediately deducted. Most business owners would prefer to have a tax deduction now vs five years from now. For example, you can elect to expense part or all of the cost of Section 179 property that you placed in service during the tax year and used more than 50% of in your trade or business. What Is Section 179 Property & What Qualifies for Section 179 Deduction? Section 179 property refers to property eligible to be immediately deducted with the Section 179 deduction. This includes the following property placed in service during the year and used in a trade or business: New and used machinery, office furniture, tools, and equipment New and used vehicles (subject to some special limitations discussed below) Qualified improvement property, such as improvements to the interior made after the building was placed in service, such as drywall, interior doors, lighting, flooring, ceilings, fire protection, and plumbing Certain nonresidential real property improvements, such as roofs; heating, ventilation, and air conditioning (HVAC); fire protection and alarm systems; and security systems Computers, off-the-shelf software, printers, and other computer equipment Smartphones What Section 179 Deductions Don’t Include Not all business purchases qualify for the Section 179 tax deduction. This deduction only applies to physical items, and you also cannot use it to deduct land and real estate. It also doesn’t include: Intangible assets, such as patents and copyrights Property purchased but not placed in service during the year Furniture and equipment used in a rental activity, unless the rental activity rises to the level of a trade or business (gray area in the tax law—consult a tax professional) Property held for investment Residential real property and improvements Nonresidential real property, except for certain improvements listed above Property received as a gift or inheritance Certain property purchased and leased to others Vehicles as Section 179 Property While vehicles are qualified as Section 179 property, they’re subject to special limitations. You can claim the Section 179 deduction for both new and used vehicles that you have purchased during the year. If the vehicle is used for both personal and business reasons, it must be used more than 50% of the time for the business to qualify for the Section 179 deduction. The law requires written evidence of the business miles to claim any deduction for a vehicle. A simple way to track the number of miles you drive is with , our top-rated accounting software for small businesses. You can track your mileage in the QuickBooks Online mobile app using your phone’s GPS. The mileage then transfers automatically to your QuickBooks Online account. Vehicles with a gross vehicle weight rating (GVWR) of 6,000 pounds or less have a maximum Section 179 deduction of $11,200. Vehicles weighing more than 6,000 but less than 14,000 pounds have a higher limitation of $27,000. No depreciation or Section 179 limits apply to vehicles with a GVWR of more than 14,000 pounds or to vehicles that have been modified for nonpersonal use. The Section 179 limitation must be reduced for vehicles that aren’t used 100% for business. For instance, if a car is used 90% for business, then the maximum deduction is $10,080 ($11,200 x 90%). If the vehicle cost is more than the maximum deduction, the remaining cost of the car is depreciated under the normal rules. How the Section 179 Deduction Works Section 179 is elected by completing Part 1 of Form 4562. This form summarizes your depreciation expense and is included with your business return. Remember the maximum Section 179 deduction of $1,080,000 for 2022 ($1,160,000 for 2023) is reduced dollar for dollar by the amount of Section 179 property purchased during the year that exceeds $2.7 million ($2,890,000 for 2023). Any Section 179 deduction claimed reduces the cost of the asset that can be depreciated over future years. If an amount of more than $3,780,000 is spent on eligible property, it won’t be eligible for the Section 179 deduction. For example, if you purchase $3 million of Section 179 property, your maximum deduction will be reduced by $300,000 (from $1,080,000 to $780,000). So, of your $3 million in purchases, you can deduct $780,000 immediately under Section 179. The remaining $2,220,000, which is $3 million minus $780,000, must be depreciated over future years. Section 179 Taxable Income Limitation and Carryover The Section 179 deduction is a great tax saving tool, but there is a slight caveat that you should know about. The total amount of Section 179 deduction that you can claim in any given year isn’t only limited by the annual dollar limit, but it’s also subject to the taxable income limit. That means that the amount of Section 179 deduction you claim cannot exceed your taxable income. Although this is the case, the IRS has granted business owners some grace. You’re allowed to carry over any disallowed cost for an unlimited number of years. This is one of the many reasons that this deduction is so great. Section 179 Recapture Remember that to qualify for the Section 179 deduction, the property must be used more than 50% of the time for business purposes. If the use falls to 50% or below, the Section 179 deduction that you claimed must be recaptured. You can think of Section 179 recapture as a way to repay the IRS for the tax benefit you received. You’ll be required to recapture all or part of the Section 179 deduction. You’ll have to include this amount on your tax return, so you’ll need to know how to figure your Section 179 recapture amount. How To Compute Recapture To figure out recapture amounts, complete the following steps: Compute the amount of depreciation that would have been allowable on the property under regular MACRS. You should begin with the year the property was placed in service and include the year of recapture. Next, subtract the depreciation from Step 1 from the Section 179 deduction you claimed. The difference is the recapture amount. Once you have figured out the recapture amount, include it in Part IV of IRS Form 4797. If you need help figuring out the recapture amount, can lighten your load. You can use either their online or desktop tax software to figure out the amount of Section 179 you need to recapture. Frequently Asked Questions (FAQS) Can I use Section 179 every tax year? Yes, Section 179 is an annual election. The maximum deduction is increased each year for inflation. Can I finance equipment and take the Section 179 Deduction? Yes, Section 179 allows you to deduct the cost of financed property even though you haven’t yet had to spend any cash. Does the date that I purchased my equipment have an impact on Section 179? Possibly. While Section 179 is a permanent part of the code and you can deduct the cost of equipment each year, the maximum deduction is applied on an annual basis and is adjusted for inflation Bottom Line Claiming the Section 179 deduction can be an immense help to your business, with substantial tax savings in the current year. With a generous limit of more than $1 million, few small businesses have to wait to deduct their equipment through depreciation. will make the Section 179 election and calculate any limitations and carryover automatically.

Bonus depreciation is an immediate tax deduction that speeds up tax savings and makes an asset that you placed in service more affordable. You may also see this deduction going by the name of the special allowance, the additional first-year deduction, or IRC §168 (k) depreciation. In general, new and used furniture and equipment with a less than 20-year Modified Accelerated Cost Recovery System (MACRS) life will qualify for bonus depreciation. Congress created this deduction as an incentive for business owners to purchase qualifying assets and to engage in business activity. Bonus Depreciation Calculator & How To Calculate Bonus Depreciation If you have recently purchased property and want to estimate your potential tax deduction, you can use our depreciation calculator below. You can also calculate your bonus depreciation manually by following these three steps. Step 1: Subtract the original cost by any section 179 expense. Step 2: Reduce the basis by the applicable percentage of any credits you claimed (such as the energy credit). Step 3: Multiply the bonus rate (100% for 2022) by the remaining cost of the asset. The product will yield the amount of bonus depreciation you can claim for the tax year. Business owners can claim 100% bonus depreciation on property placed in service before 2023. For property placed in service after 2022, the following bonus depreciation rate applies: Pros & Cons of Bonus Depreciation How To Claim Bonus Depreciation If you're ready to start your return and are looking for the best tax software to use, you can work on your return in , which will calculate the amount of bonus depreciation you're due on IRS Form 4562. The bonus depreciation allowance for qualified property (other than listed property) will appear on Part II, line 1. As for listed property, bonus depreciation will appear on Part V, line 25. Depending on how your business is structured, the amount of bonus depreciation reported on Form 4562 will be carried over to one of the following forms in TaxAct: Schedule C Form 1120-C Form 1120-S Form 1065 Which Assets Qualify for Bonus Depreciation Bonus depreciation applies to new or used qualified property. Under IRS guidelines, qualified business property is MACRS property with a recovery period of 20 years or less, depreciable computer software, water utility property, or qualified improvement property. The following property qualifies for bonus depreciation: Office furniture: Includes desks, files, safes, communications equipment, and similar items Information systems: Includes computers and peripheral equipment, such as card readers, printers, projectors, and disc drives, used in conducting normal business activity. Vehicles: Includes cars, trucks, vans, and even over-the-road semis; however, bonus depreciation on passenger automobiles that weigh 6,000 pounds or less is limited to $8,000. Let’s take a look at a couple of examples of how bonus depreciation could play out with MACRS property. Example 1: In January 2022, Bob Builder purchased office furniture for their new construction firm. They paid $500 for the furniture. Office furniture is seven-year MACRS property, and they're claiming 100% bonus depreciation. They do not have any other applicable credits or deductions, so they can claim a total of a $500 depreciation deduction when they file their 2022 tax return. Example 2: The same facts as above, except Bob Builder purchased office furniture and placed it in service in 2023. Bonus depreciation will start to decline by 20% after December 31, 2022. Bob Builder’s 2023 bonus depreciation will be $500 x 80% = $400. The remaining $100 of the cost will be depreciated for 7 years under the normal MACRS rules. Maximizing Bonus Depreciation With a Cost Segregation Analysis If you're a business owner who owns a 27½-year or 39-year property, such as a warehouse, office building, or residential rental property, you may want to think about performing a cost segregation analysis. Cost segregation studies are in-depth analyses of the cost of components and fixtures inside of buildings and typically are performed by a qualified individual such as an engineer, appraiser, or contractor. By segregating the cost of MACRS property with shorter lives from the cost of the building, you can claim bonus depreciation on the individual components of property. So, any equipment, furniture, and fixtures, such as a heating, ventilation, and air conditioning (HVAC) system, on the property will be eligible for bonus depreciation. During the study, the components that make up the building will be analyzed and given a recovery period of five, seven, and 15 years. This can be a great strategy to help you take advantage of the bonus depreciation deduction, create tax savings, and increase your cash flow. Election to Claim 50 Percent Bonus Depreciation or Opting Out While it's beneficial for you to speed up depreciation, you have a few options for claiming bonus depreciation. 1. Do nothing and claim the 100% bonus depreciation. By doing nothing, you'll claim 100% bonus depreciation automatically for property that you have placed in service during the 2022 tax year. 2. Attach an election to use 50% bonus depreciation. As part of your business strategy, you may decide to claim the 50% bonus depreciation instead of the 100% bonus depreciation deduction. You may wish to make this election if your marginal tax rate is unusually low for the tax year. To elect out of 100% bonus depreciation, you'll simply need to attach a statement to your tax return showing that you would like to claim 50% bonus depreciation. The election must be made separately for each MACRS class life. 3. Attach an election to not use any bonus depreciation. You can also opt out of claiming bonus depreciation and instead calculate your depreciation under the normal MACRS rules. As with electing 50% bonus depreciation, the election is made separately for each asset class. For instance, you can elect out of bonus depreciation for five-year property but still claim 100% bonus depreciation for seven-year property. If you have expiring charitable deduction carryforwards or credit carryforwards, you may decide to opt out. Since charitable deduction carryforward and other credits are limited by your taxable income, you may decide not to claim bonus depreciation to keep your current income high enough to take full advantage of any carryforwards or credits that may be expiring. If you find yourself in any of the above scenarios, you need to attach a statement showing the class of property to a timely filed tax return, including extensions. Let's look at what this election statement should look like. Frequently Asked Questions (FAQs) Does only new property qualify for the bonus depreciation deduction? No, the Tax Cuts and Jobs Act (TCJA) changed this rule, and you can now claim bonus depreciation for new and used property that meets certain requirements. What happens to bonus depreciation after Jan. 1, 2023? In 2023, bonus depreciation will be reduced from 100% to 80%. It'll continue to be reduced each year until the deduction will be 0% by 2027. Can I choose which assets to claim bonus depreciation on? No, bonus depreciation is automatic, but you can elect to opt out of bonus depreciation for an entire asset class. However, you cannot choose individual assets to be depreciated differently. Once the election is made, it applies to all assets in the same class. Opting out bonus depreciation for one asset class does not affect bonus depreciation for other asset classes. You can opt out for all seven-year property but still claim bonus depreciation for all five-year property. Bottom Line Bonus depreciation is a valuable cost-saving tax incentive that you do not want to miss out on. It allows you to deduct 100% of the cost of an asset in the current tax year, 2022, as opposed to depreciating its cost over the useful life.