The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 98 - Dangers of 100% Bonus Depreciation
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Bonus depreciation offers enticing tax benefits but comes with significant hidden risks for business owners and investors who don't plan beyond the initial tax savings. We examine the dangers of relying too heavily on bonus depreciation strategies and provide alternative approaches that don't create future tax problems.
• Bonus depreciation allows writing off a percentage of qualifying assets immediately rather than over their useful life
• The Tax Cuts and Jobs Act provided 100% bonus depreciation from 2017-2022, now phasing down to 40% in 2025
• Financing assets for tax write-offs still requires paying the full purchase price over time
• After claiming depreciation, loan payments become essentially non-deductible, creating "paper income"
• Selling assets before their useful life creates depreciation recapture taxed at ordinary income rates
• More balanced tax strategies include income shifting, entity structuring, and hiring family members
• The Augusta Rule and employing children can provide up to $100,000 in deductions without creating future liabilities
• Prioritize assets that generate sufficient returns to justify their purchase beyond just tax benefits
• Smart tax planning considers both immediate savings and long-term financial implications
To learn how these concepts apply to your specific situation, visit prosperlcpa.com/apply and schedule a consultation.
There's all this excitement among the entrepreneurs and those of you looking to win the tax game and the tax enthusiasts and you'll see it in a lot of the Instagram social media guru folks about 100% bonus depreciation coming back under Trump. I get it. It sounds exciting and in some ways, it makes it a lot easier To wipe out all of your taxes here. But hold on a second here. There are some dangers that we don't want to overlook here, because there are some hidden Consequences Of relying on bonus depreciation to offset your taxes that a lot of people I see this so often that people overlook the challenges that come when you take bonus depreciation on your assets. So what we're going to dive into today is I'm going to give you some insight into what is this bonus depreciation thing. Now, some of you guys already know that stuff. I'm sure you've heard me riff on this topic quite a bit, but we're also going to be talking about what are some of the where are we, where are we potentially going and probably going, and also what are some of the misleading ideas and things being pushed into social media here and how can we make sense of this, what are some dangers to avoid here and solutions we can find to protect ourselves against being a little bit misled and oversold on all the benefits of bonus depreciation. So let's dive into it. What is bonus depreciation? And, guys, by the way, I'm sorry if you've heard me talk about this a million times, but let's get the foundations here.
Speaker 1:What is bonus depreciation? Well, when you have an asset that depreciates in under 27 and a half or 30 years, you write it off over time, right? Generally speaking, you have a five, seven, 10 year asset, 15 year asset, you're going to write it off over time, over the five year life, et cetera. Right, you write it off over time. You may be able to write off more than one-fifth of a five-year asset up front using double declining basis depreciation. We don't have time to explain all the nuances there, but you're generally writing off that asset over the depreciation life of that time. Now, what that means for most of you guys is you have your vehicles and that's going to be five-year life property. Most of the non-real estate stuff we're talking about is five-year life property Heavy equipment, five-year life Furniture, five-year life like electrical equipment costing over $2,500, five-year life property. So, instead of writing it off over five years, you may be able to get bonus depreciation on that item. So with bonus depreciation, you can write off 40%. Based on the current law, you only write off 40% Now. That number used to be at 100%. There are other depreciation elections out there and we can go on a really elaborate conversation on section 179 and, when you can use it, the phase outs, but we're going to just focus on bonus for now.
Speaker 1:Keep things as simple as possible. 179, by the way, is not bonus and I'm sure you've heard a lot of people misleading, misguiding you guys on that. But anyways, back to this thing called bonus. You can write off as much of. You can pretty much take an unlimited amount of bonus depreciation, create major tax losses and it's just been a huge win in the prior years because when we had the Tax Cut and Jobs Act in 2017, you were able to write off 100% bonus depreciation for any asset that had under 27 and a half years. So you bought a heavy vehicle If it weighed over 6,000 pounds, you write off the whole thing, even if you finance it. If you purchase heavy equipment, buy solar panel rentals, whatever it is, even improvements to the land, that's 15-year life property right off 100%. Swimming pool finance it right off 100%. So there was a time where it was really easy for us to eliminate a lot of our clients' taxes that were just buying some real estate.
Speaker 1:Well, that bonus depreciation tax incentive was set to phase out and it started phasing out. It went down to 60% in 2024. And then in 2023, it was at 80 percent, but really in in uh 2022 that was the last year where we had a hundred percent bonus. So we we had bonus depreciation. It was like the golden era of this crazy tax savings. We had bonus depreciation from 2017 to 22, and then it started phasing down by 20% each year and right now, in 2025, as the current loss stands, we're down to 40% and is expected to continually phase down where you can, instead of writing off a hundred percent of that asset.
Speaker 1:If you use your bonus depreciation, you get that initial deduction amount, but then that becomes less and less as the years progress. So 40% bonus depreciation is not that exciting and that's where we are currently at. So if the vehicle is over 6,000 pounds and you want to get bonus, you're only going to write off 40% instead of 100%, and our real estate investor clients are also a little you know, a little let down here. Because you do these cost segregation studies, you pull out the furniture of the study, you identify the value of the land improvements. In the past you'd be able to write off 100% of all those items that we found in the cost sags, and this often came to us writing off anywhere from 20 to even as high as 50% of the real estate purchase in year one. Even if you're financing it, you're only putting a fraction of that amount down. So with it being phased down, a lot of folks are excited to get back to this golden era of 100% bonus depreciation.
Speaker 1:Very exciting stuff here for a lot of our tax enthusiasts and our bloggers and our real estate investors. Now, one of the reasons why people really like taking advantage of bonus depreciation is because you can leverage the purchase of an asset and still write it off. 6,000 pound truck, put zero money down, but it's a $50,000 truck. You get a $50,000 tax deduction and no money leaves your pocket. How awesome is that? Right and same with real estate. We had folks putting 20% down on real estate and writing off 30% on their taxes. Or maybe some of our clients were getting these second home mortgages for short-term rentals, putting only 10% down and oftentimes writing 30% to 40% of that short-term rental off. So for our clients that were high W-2s, they would essentially get their down payment back from the savings of the cost segregation study. So that's the really exciting stuff you can use other people's money to buy assets and write off the assets right away.
Speaker 1:Now, while all this sounds great, and using other people's money to get a write-off and really seeing the time value of that immediate write-off all that stuff is fantastic. But you got to do some long-term planning here and we also have to consider the potential challenges. So first thing we want to think about is you are taking on debt. Debt equals risk. You know you're going to see these flashy Instagram influencers saying I bought this G-Wagon, I wrote it off right away.
Speaker 1:Well, you still got to buy this stupid car. Do you really need the car? You know, let's say you buy a $100,000 car. Let's say you're in the 30% federal bracket. You write off. Let's say we're at 100% bonus, you write off the entire $100,000 car. You put minimal money down At a 30% bracket. That's $30,000 of tax savings. So none of the tax savings is like you're paying $70,000. You get your tax savings in year one, but what happens with that tax savings? Well, maybe you hopefully you take that tax savings and reinvest it into other things that make you money, instead of buying yourself a fur coat and a Lamborghini.
Speaker 1:But at the end of the day, you still got to pay off a $100,000 vehicle. So this vehicle has to make sense. This asset you're purchasing has to be a legitimate business asset that is going to hopefully produce more revenue and more income and really enrich the value of your company and the profitability capable of earning here. And so what if it's not? Well, think about this. The next five years that you're owning this thing assuming you're paying it off over five years you're going to be shelling out, like what? Over 20 grand a year and you're only going to write off the interest. So money is leaving your pocket now to pay off the loan and it's not even a tax deductible. Again, you're just reducing an accounts payable.
Speaker 1:How awesome is that? Right? Not very good. So we talk about you know, a lot of people talk about how awesome it is that depreciation gives you these paper losses. Right, because you get to have all these write-offs but you're not really spending a whole lot of money to get them. But the reverse is true. When you're paying off the debt, you have paper income. Isn't that so wonderful? So think about this. We can have unprofitable real estate where you get really excited about these cost sags and all this stuff. But we now found that the real estate investment while we had this awesome tax refund and we're so excited the real estate isn't doing so hot, your cashflow negative. Now you're spending all this money on the mortgage. Only a portion of it is tax deductible.
Speaker 1:And let's say you're an early stage investor and now you want out. You realize it isn't worth the tax savings. It isn't worth taking advantage of the short-term rental loophole just for the tax savings. Now you want out. Just get rid of this stupid thing. I want to go back to my job. I can't focus, I'm not making any money. Why am I doing this?
Speaker 1:Well, guess what's going to happen. You're going to have depreciation recapture on that property. So let's say you bought it for half a million, you wrote off a good chunk for bonus in the cost seg and then you sell it for the same price. You may expect that there's no tax liabilities on that. Well, you're wrong, because any write-offs that you took for depreciation are recaptured and taxed when you sell it. And when you do a cost segregation study and you have bonus depreciation, the recapturing of that write-off is taxed at your marginal rate. You're not going to have that favorable long-term capital gains rate. It's taxed at your marginal rate. It may even bump you up into a higher tax bracket.
Speaker 1:So before you think about buying lots of trucks and all these other items, while that initial savings may look great, if you find that these are not really the best performing assets these are not assets that are actually helping you you're going to spend the next five years paying are not assets that are actually helping you. You're going to spend the next five years paying off these assets that are just going to be a money pit. And think about how challenging this is going to be for you. You've already written off the vehicle, right, but you're still paying off all the debts. So what's going to happen if? Imagine your business is cash flow negative because you're paying off all these debts, but when we file your tax return it's going to show a profit because all the money leaving your bank account to pay off this debt is for the purchasing of stupid assets, of stupid assets or just assets that where you had the right off, but you didn't really plan for the paying it off on time and budgeting for the debts.
Speaker 1:So think of now we have this. We're on the other side of the spectrum. We have this great phantom loss, this great paper loss, but then we have paper income. Obviously, that can be offset by purchasing more assets, but do you really want to continue doing that if you're not really buying assets that are suitable for your company and there still is that psychological pressure of taking on debt? So what I'm saying here is you want to be smart with your asset purchases.
Speaker 1:There's this tax incentive available. Yes, you get to have those initial write-offs and that makes it easier for you to invest into your business, invest into your company and buy these assets and buy this real estate. But you still need to see cash flow in the real estate to help pay off the debts. You're still going to need to profit and have additional value generated from this equipment or the truck or wherever it is to help you pay off the loan on the car. And also, you should think about what are you going to do with the tax savings. Well, hopefully you're not spending too much of it on just your consumption budget and buying video games or whatever it is. Hopefully you're reinvesting that tax savings to other things that will help you make more money to allow you to pay off the debts or maybe pay off potential future taxes. Now, some other things you want to think about here regarding potential solutions or just ways to think about this is bonus depreciation. While it could wipe out 100% of a lot of your taxes in this situation, it's not the only solution.
Speaker 1:Tax planning is about more than cost seg. It's about more than just buying a big truck. There's so much more to look at here. We have income shifting, entity structuring, we have retirement account structures and then, for some of our clients at the higher levels, we have some really interesting and exciting and exclusive structures and planning mechanisms charitable planning. We also want to look into QBI deduction, the timing of all these items. There's a whole world of things to consider in tax planning Alternative asset investments, spinoff entities all this has to be considered. And then, for all of you entrepreneurial folks listening, let's not forget our foundational opportunities, those easy wins hire the kids, augusta Rule I was just talking to a client three kids.
Speaker 1:You hire the three kids. If you have the opportunity to legitimately pay them, let's say $20,000 each. I know I'm recommending more than the standard deduction because I say, why not? If they're in a lower bracket? They're only going to pay 10% over that initial standard deduction. So you can hire the kids Sure, fantastic and do the Augusta rule. If you take these things to the max, that could be $100,000 tax deduction and you're not taking on any debt. There's no future downside or risk. You don't have to worry about the depreciation recapture. Another quick thing on the recapture is you don't just see it for real estate, but also, if you were to sell the trucks and realize it was a bad purchase, be ready for that recapture.
Speaker 1:Some other things I want you to think about here is doing that holistic tax planning. It's not just about thinking about the initial tax savings you're going to see in the current year, but what are we doing to ensure that we have future tax savings? What are we doing with our tax savings to reinvest into other vehicles that can further reduce our taxes? And what kind of decisions are we making in our business now so we can protect ourselves from taxation in the future? All this has to be looked at Our purchases, our sources of income tax stream, the structure, our tax savings. I mean our profitability now and in the future and the profitability of our other family members. So, as you can see, there's just an infinite things that we're always thinking about when it comes to tax planning.
Speaker 1:When you're talking to a tax nerd like me, I really enjoy this stuff. I think this stuff is fascinating. Enjoy this stuff. I think this stuff is fascinating, and what I want you to take away from this is that, yes, bonus depreciation seems like it's likely coming back and we'll be talking all about it and really covering more of this Trump tax planning updates as they come along. But also remember, don't abandon the fundamentals and make sure that bonus depreciation isn't the only thing you're doing to plan for your taxes. All right, I hope you found this conversation interesting and maybe a little contrarian. It's just something that I've been thinking about as well. It's just a topic that's often overlooked, and if you want to learn more about this and have a conversation on how these concepts may apply to you, you can always go to prosperlcpacom slash apply. Sorry, it's a late night. I'm here in Bangkok, thailand. Anyways, prosperlcpacom slash apply. Have a great day. Happy tax savings. We've got more great content coming your way.