Section 168(k)

Definition

Section 168(k) of the Internal Revenue Code allows for bonus depreciation, which enables businesses to immediately deduct a significant percentage of the cost of qualified property in the year it is placed in service. This provision enhances cash flow for businesses by accelerating depreciation deductions, which can significantly reduce taxable income in the initial years of asset acquisition. The bonus depreciation is particularly beneficial for encouraging investment in new equipment and property.

5 Must Know Facts For Your Next Test

1. As of the Tax Cuts and Jobs Act (TCJA), businesses can claim 100% bonus depreciation for qualified property placed in service between September 27, 2017, and December 31, 2022.
2. The bonus depreciation rate will decrease to 80% for property placed in service in 2023 and will continue to phase down by 20% each year until it reaches zero in 2027.
3. Section 168(k) applies to both new and used property, provided that the used property was not previously owned by the taxpayer.
4. Bonus depreciation can be claimed even if a business does not have taxable income, allowing companies to create net operating losses that can be carried forward.
5. To qualify for bonus depreciation under section 168(k), property must be used primarily in the active conduct of a trade or business.

Review Questions

• How does section 168(k) enhance cash flow for businesses through bonus depreciation?
  • Section 168(k) allows businesses to immediately deduct a substantial portion of the cost of qualified property, which leads to significant tax savings in the year the asset is put into service. This immediate deduction enhances cash flow by reducing taxable income right away, thus freeing up capital that businesses can reinvest into operations or other assets. As a result, companies can better manage their finances and invest in growth opportunities sooner than they would under traditional depreciation methods.
• Evaluate the implications of claiming bonus depreciation on a company's long-term tax strategy.
  • Claiming bonus depreciation under section 168(k) can provide immediate tax relief but may also impact a company's long-term tax strategy. While it reduces taxable income substantially in the early years, this acceleration of deductions means that there will be lower deductions available in future years. Companies need to carefully consider how this affects their projected earnings and tax liabilities, particularly if they expect their income to increase over time. Balancing short-term benefits against long-term planning is crucial when deciding whether to utilize bonus depreciation.
• Synthesize the benefits and potential drawbacks of using section 168(k) for different types of businesses when acquiring new assets.
  • Using section 168(k) offers various benefits for businesses acquiring new assets, such as immediate tax savings, improved cash flow, and incentivizing investments in equipment. However, potential drawbacks include lower future depreciation deductions which may impact businesses with steadily increasing income. For small businesses or startups, the immediate tax relief can be crucial for sustaining operations. In contrast, larger companies with predictable profit growth might prefer slower depreciation methods to spread out their tax liabilities more evenly over time. Thus, the decision to use bonus depreciation must align with each business's financial strategy and growth trajectory.

Related terms

Depreciation: A method of allocating the cost of a tangible asset over its useful life, allowing businesses to recover the cost through tax deductions.

Qualified Property: Property that is eligible for bonus depreciation under section 168(k), including new and certain used property with a recovery period of 20 years or less.

Taxable Income: The amount of income subject to tax after accounting for deductions, exemptions, and credits, which can be reduced by depreciation deductions.