What is Bonus Depreciation? Maximize Your Tax Savings with the Mid-Month Convention

Bonus Depreciation is a tax benefit that lets businesses deduct a large part of the cost of qualifying assets in the first year they are used. This can lower your taxable income and save your business a lot of money immediately. Bonus depreciation continues to be a great way to maximize your tax savings.

Let’s break it down step by step so you can understand how it works and how to use the Mid-Month Convention to get the best results.

What is Bonus Depreciation?

Bonus depreciation, as established under the Tax Cuts and Jobs Act (TCJA) of 2017, allows businesses to deduct 100% of the cost of qualifying assets in the year they are put into use. This includes machinery, equipment and property upgrades as long as they meet certain conditions.

In simple terms, it speeds up the depreciation process, allowing businesses to claim a larger deduction right away instead of spreading it over several years.

However, there’s a limit: bonus depreciation only applies to property with a useful life of 20 years or less, such as machinery, vehicles, and some real estate improvements. The purpose of this deduction is to encourage businesses to invest in new assets and grow.

2024 Changes to Bonus Depreciation

In 2024, businesses can deduct 60% of the cost of qualifying assets under bonus depreciation. The 100% bonus depreciation that was available from 2018 to 2022 has been gradually reduced. The 60% deduction will apply to assets placed in service in 2024, and it will continue to decrease in the following years:

• 2024: 60% bonus depreciation
• 2025: 40%
• 2026: 20%
• 2027: 0% (unless new laws are passed)

This gradual reduction means it’s important to act quickly if you want to take advantage of bonus depreciation at the 60% rate while it’s still available.

What is the Mid-Month Convention?

The Mid-Month Convention is a tax rule that changes how depreciation is calculated for assets like real estate or property with more than 12 years of useful life. Under the Modified Accelerated Cost Recovery System (MACRS), assets are usually depreciated over their expected life (for example, 27.5 years for residential rental property and 39 years for commercial real estate). However, the Mid-Month Convention assumes all assets are placed into service in the middle of the month they are bought.

Why does this matter? Instead of calculating depreciation based on the exact number of days the asset was in use, you get a full month’s depreciation for the month the asset is placed into service. This can make a big difference in the first year, especially when combined with bonus depreciation.

How to Use Bonus Depreciation with the Mid-Month Convention

You can use bonus depreciation along with the Mid-Month Convention to make the most of your tax savings. Here’s how:

Example 1: Buying a Property in November 2024
Suppose you buy a commercial building in November 2024 for $500,000. Since the building qualifies for bonus depreciation and uses the Mid-Month Convention, the IRS assumes it was placed into service in the middle of November. You could claim depreciation for half of November (about 1.5 months) and also get the bonus depreciation benefit for the year.

Example 2: Purchasing Business Equipment in December 2024
If you buy machinery for $100,000 in December 2024, which qualifies for 80% bonus depreciation, you could deduct the entire 60% in the first year. The Mid-Month Convention means you’ll get half of December’s depreciation, giving you a small bonus in your tax savings for that year.

Using the Mid-Month Convention ensures you don’t miss out on any depreciation deductions for the first year, even if you buy your asset later in the year.

Additional Considerations

Although bonus depreciation and the Mid-Month Convention can provide hefty tax savings, here are a few things to remember:

• Asset Qualification – Make sure the assets you’re purchasing qualify for bonus depreciation. Typically, this includes physical property like equipment, machinery and some property upgrades.
• Section 179 vs. Bonus Depreciation – Section 179 also lets businesses deduct the full cost of qualifying property in the year it’s used, but it has limits. Bonus depreciation doesn’t have these limits so it can be more beneficial for larger purchases.
• Impact on Taxable Income – Using bonus depreciation will reduce your taxable income in the first year, lowering your tax bill. However, this means you’ll have less depreciation to claim in future years.
• State Tax Considerations – Some states don’t follow federal rules for bonus depreciation. Be sure to check your state’s tax laws to see how they handle it and if it will be recognized at the state level.

Key Takeaways

• Bonus depreciation lets you quickly deduct a big part of the cost of qualifying assets, giving you an immediate tax benefit.
• In 2024, businesses can deduct 60% of the cost of eligible assets in the first year, but this percentage will drop in the coming years.
• The Mid-Month Convention ensures assets placed in service mid-month still get a full month’s depreciation, helping maximize your deductions.
• When planning purchases, compare Section 179 and bonus depreciation to see which option offers the best tax savings.

Conclusion

Using these tax rules wisely can lower your 2024 tax bill, leaving you with more money to put back into your business. Whether you’re buying new equipment or investing in real estate, understanding how to take advantage of bonus depreciation and the Mid-Month Convention is key to maximizing your tax savings.

Always consult with a tax professional to ensure you’re making the best decisions for your unique business situation.