Bonus Depreciation: Does that include furnishings?
HURRY! Time is running about to take advantage of the 80% bonus depreciation for 2023! And that includes furnishings!! Bonus depreciation is a tax incentive provided by the U.S. government to encourage businesses, including those involved in short term rentals, to invest in new capital assets, such as buildings, equipment, or furnishings. It allows businesses to deduct a significant portion of the cost of these assets from their taxable income in the year the assets are placed in service, rather than spreading the deduction over several years through regular depreciation.
Here's how bonus depreciation works for short-term rentals:
1. Eligibility: To qualify for bonus depreciation, the asset must meet certain criteria. It must be new, have a useful life of 20 years or less, and generally be depreciable under the Modified Accelerated Cost Recovery System (MACRS).
2. Percentage Deduction: The Tax Cuts and Jobs Act (TCJA) increased the bonus depreciation percentage for qualified property to 100% for assets placed in service between September 27, 2017, and December 31, 2022. This means you can deduct the entire cost of the eligible asset in the year it is placed in service. However, after 2022, the bonus depreciation percentage is set to gradually phase down as follows:
2022: 100%
2023: 80% for property entering service between 12/31/2022 and 1/1/2024
2024: 60% for property entering service between 12/31/2023 and 1/1/2025
2025: 40% for property entering service between 12/31/2024 and 1/1/2026
2026: 20% for property entering service between 12/31/2024 and 1/1/2027
3. Qualified Improvements: For short term rental property owners, this can be particularly beneficial when making improvements or renovations to rental units. Qualified improvement property (QIP), which includes interior improvements to non-residential real property like short-term rental units, also became eligible for bonus depreciation under the TCJA. This allows you to write off the cost of these improvements in the year they are made.
4. First-Year Expensing: In addition to bonus depreciation, the TCJA also increased the maximum amount that can be expensed in the first year under Section 179 of the tax code. This can be beneficial for smaller property improvements and personal property like furnishings, as it allows you to deduct up to a certain dollar limit in the year the property is placed in service.
5. Impact on Tax Liability: By taking advantage of bonus depreciation and other tax incentives, you can significantly reduce your taxable income in the year you acquire or improve the short term rental property. This can result in lower tax liabilities and potentially provide more funds for further investments or operational expenses.
Learn more from MTR expert, Jesse Vasquez, and two top real estate CPAs, Amanda Han and Matt MacFarland from KeyStone CPA.