NEW 100% Write-Offs Under Trump's One Big Beautiful Bill

Hey guys, Toby Mathis here. And today we're going to talk about how to use the new 100% write-offs. And I do mean that with an S, write-offs under the one big, beautiful bill, whether it's equipment, vehicles, build-outs, and even a new building deduction, I'm going to go over them today. So if you own a business or real estate, the new law, the one big, beautiful bill, brought back this 100% bonus depreciation and even created a brand new 100% deduction for certain production buildings. Today I'll show you how to legally turn big purchases into immediate deductions with real examples that you can model. So stick around for timelines and traps so you don't blow it. All right. My name is Toby Mathis. I'm with Anderson Business Advisors and we help entrepreneurs and investors preserve, protect, and prosper. That's our mission. This is educational. So you talk to your own pro before you act, or you can always reach out to us. All you have to do is go down in those comments at any time you would want to say, Hey, I want someone to talk to me, just write consult and put it down in the comments. If you are planning to do equipment, vehicles, property improvements, or a production facility, this could be worth six or seven figures in tax savings under this brand new one big, beautiful bill. So let's go. All right. The big one, what you're hearing everywhere everywhere is this a hundred percent bonus depreciation is back and it's now permanent going forward. There's no expiration like last time. And what this means in plain English for qualifying property, which is generally 20 year property or less, you can often deduct 100% in the year you place it into service. Even if you finance it, you put it on a credit card, you can write it off a hundred percent. Even certain leases still qualify. And let's start with how this normally works. The IRS assigns lifetime to, you know, to assets. For example, if you buy a computer, the IRS says, Hey, this is a five year asset and allow you to deduct it over five years. There are other laws, most notably section one 79 and one 68 K bonus depreciation, which is the biggest change of the one big, beautiful bill. But it's important that you understand how the IRS looks at these things before we get too far ahead. So the IRS says you start with what's your basis. What did you pay for it? Then you classify the asset is this five year, seven year, 15 year, what kind of property is it? Then you pick your depreciation method and then you choose when it is in service. Then after all of that, you get to calculate the annual deduction by choosing whether to apply section one 79 or one 68 K, right? Makes sense. Clear as mud, right? This is why you have accountants, but let me give you an example. So let's say you buy a hundred thousand dollars of equipment. Think like a pizza oven in a pizzeria. This includes, by the way, the delivery, the sales tax, the installation, it all costs you $100,000 to get it in that shop up and running and working. That is its basis. It's a hundred grand. Not what you paid for it, but everything, the sales tax delivery, everything. Yeah. Add all that into the basis. Now let's assume you did this in June. You place the ovens into service at that time. So they actually have to go in and start being used, right? You get to choose the half year convention, right? The IRS has this things called Mackers modified account, you know, uh, cost recovery, accounting, cost recovery system table. That tells you how much you can deduct each year for those five years. It's like a big mind bender, but under Mackers using the half year convention, you would get like, I'll go through the actual numbers on a hundred thousand dollars. It's about $20,000 in year one, $32,000 in year two, 19,200 in year three, noticing it starting to tailor down, right? In a year four, you would get $11,520 in year five. And remember this is like you did a half year. So this is only partial $11,520. And then in year six, because remember we put it in service half year. So we're going to be going over two years. You get another 5760, but wait a second. You paid for the oven in year one. So is your mind hurting yet? Right? I'm paying for it, but I'm spreading out the deduction over many years. Okay. But this will make it simpler before you get to Mackers, that whole cost recovery system, you get to choose the deduction. And what do I mean by that? Well, there are two sections that allow you to accelerate that deduction. Number one is IRC 179. A lot of times you hear people say section 179, and this says you can deduct up to $2.5 million in equipment purchased in 2025 in year one, no matter when you place it into service during the year. But this, this is a big, but you cannot create a loss with section 179. Your deduction cannot create a loss, but section 179 has some hidden talents. You can choose what amount you want to apply to section 179. In other words, you don't have to use the whole thing. For example, you could use $30,000 of the hundred thousand dollar oven that you purchased in year one and depreciate the rest. And you're saying, Toby, why the heck would I do that? Because we want the deduction to get into the highest tax brackets, right? We want that deduction to offset those, not the lower tax brackets. You don't need to get greedy and get down to zero. You want to be in the lower tax brackets. That's okay. But let's take the a hundred percent. Boom. We just want to take it. Now here's the rub. Let's say we want to do the a hundred percent in the first year. You have to use those ovens at least 50% for business or you get recapture at your ordinary rate. Now what is, what does that mean? So let's just put it this way. If you quit using the ovens for business or the usage drops below 50% the entire section 179 deduction comes back. In other words, have to recognize it as a tax amount. The amount of tax would be the difference between what you took under section 179 and what you would have been able to take under mackers the five year property, but it will hurt. This point often comes up not about pizza ovens, but it's when people write off their trucks a hundred percent under section 179 you've heard them that the tick tock influencers saying to buy a G wagon at the end of the year and write it off. They don't like it when they get nailed because in year two they were driving that G wagon around primarily personal and they get nailed with an unexpected tax bill. But let's go on. The next deduction you could use is under the one big beautiful bills, a hundred percent bonus depreciation. This is the golden ticket. You see you get the a hundred percent plus it can create a loss. Plus there's no recapture if usage drops below 50% unless it is something called listed property and that's things like items for entertainment. There's passenger cars and trucks, airplanes. Think property used for entertainment or recreation. Otherwise you don't have to worry about it. So for our pizza ovens, this is a sledgehammer, right? It gives us a hundred percent. We can create a loss and we can quit worrying about it so long as we used it 50% in that first year. So what else can you use? Section one 68 K bonus depreciation for? Well it includes most business acute equipment. Things like machinery, furniture off the shelf software and 15 year land improvements. This is a big one for you. Real estate investor. And this is like paving, fencing, sight lighting and qualified improvement property, nonstructural interior improvements to commercial buildings after they're placed in service. That's huge. It does not include land or the building structure itself, right? It also does not include inventory or intangibles. So sorry to those tick tock tax influencers who say really stupid things like you can ride off a Rolex. No, you can't. It's personal use or it's inventory and neither one's going to work for you. It's not going to get you a deduction under bonus depreciation. But what about caveats using bonus, right? Well here's some important things. Bonus depreciation is class wide. If you bonus one asset, say five year property, you've, you have to choose bonus depreciation for all five year property that you have and it's automatic. You either get a hundred percent bonus depreciation or you elect out. So all five year property, seven year property, 15 year property is going to be bonused unless you elect not to use bonus. And what does that mean? It means you take 100% of the expense as a deduction in the year it is placed into service unless you elect out of it. Number two, not all states allow bonus depreciation for state tax purposes and there are states like California, New York, New Jersey, Illinois, Massachusetts, Pennsylvania is in there, North Carolina, South Carolina, Indiana, Arizona, Georgia, Connecticut, Michigan. They don't follow the federal law, so you might be better off using section one 79 depending on your circumstances and that is why you want a good accountant who understands these things. But let's get back to the a hundred percent bonus depreciation. Real estate investors have lost their minds, right? This is why real estate investors are celebrating this. You see section one 68 K bonus depreciation allows you to deduct all sort of things that would normally be depreciated under, you know, your normal depreciation schedules for real estate, which is 27 and a half years or 39 years. For example, land improvements, right? Most people think you need a cost segregation to take them. By the way, that's not always the case. So I'm going to give you a few quick rules, right? And this is right. These are down if you're a real estate investor because this is going to come back to you at some point. If you spend new money for site work like paving, fencing, pole mounted lighting, curbs, sidewalks, irrigation, drainage, retaining walls, right? You know, you already know the costs from the invoices. So you would just classify that as 15 year land improvements and take a hundred percent bonus bonus depreciation. When you place that property into service, no cost segregation study is needed for that new spend. And I did not misstate that. You don't have to do a cost seg study if you're spending new money, but if you're buying an entire property and we're going to carve out the five, seven and 15 year property and you want to put that into faster buckets, that's when you need to use a cost segregation study. So let me give you guys some real life examples or good, good stories, right? Let's let's call it Maria's landscaping company, right? So Maria Lund runs a landscaping company in March this year. She buys $350,000 in equipment. Think mowers, loaders, compact trailers, yada, yada, yada. And in addition, she spends $40,000 in software and office gear, right? She's making her business home, but she's also got a site, a business site and she improves her business site. You know, what we call a yard or whatever you call it by paving the lot, installing some security. Maybe she put a fence around it. Maybe she puts a security gate and some lighting in there, all of that. And because all of that that I just mentioned is 20 year or less property. And, uh, and it, it, it's a big chunk. It's 15 year land improvements. She can bonus get this a hundred percent in the year. She placed it into service. So if that's 2025, that is, so we're saying March of 2025, she's going to get that entire deduction. Boom this year, that's a potential $450,000 deduction in year one. And she doesn't need to do a cost seg for the yard improvements, right? Because those are direct. She can, she tracked those project costs. If let's say she also bought a heavy duty truck, that's over the 6,000 pound gross vehicle weight for business. That's, that's typically bonus eligible to write as a standard passenger car is subject to something called the passenger auto cabs. But I'll get to that in a second, but she buys that big old truck also can be deducted in year one. So here, here's a quick tip for you. If you want to smooth out deductions into future years, in other words, I don't want the a hundred percent bonus right away, right? If you want to use those deductions in future years, because you already are at a loss or just because you prefer your deductions in the highest tax brackets, maybe you're up in the thirties and you want your deductions to be there as opposed to in one year offsetting some 12% tax, right? You, you might be okay. Saying, Hey, you know, if it's under 20, if it's under 22, I'm cool. If it's in the thirties, I want to deduct it. Well, then you could elect out a bonus depreciation for certain classes of property. So five year, seven year, 15 year, you can choose and it can be an intentional choice on your return. You could say this class a hundred percent, this class using mackers, right? And let's go back to section one 79 for a minute, too. I want you to think of section one 79 in section one 68 K bonus depreciation as follows. One 68 K is your sledgehammer. It smashes an entire category, five year property, sploosh, right? Seven year property, a hundred percent bonus depreciation for the year. One 79 is more like a regular hammer or better yet. Let's just call it a scalpel because section one 79 lets you elect to expense certain property asset by asset. Unlike bonus depreciation, which is a class wide rule. You could say, Hey, pizza oven. I want to write off. Like I want a big deduction now, but something else I may let it be spread out over five years. The deduction amount is larger now that 2.5 million with phase outs at higher levels as well. I think it's over 4 million. So why use section one 79 when bonus is a hundred percent? Well, because we can target items bonus can't reach. For example, there's certain non-residential roofs and HVAC systems that you can qualify for section one 79, but are not eligible for bonus depreciation, right? Now is your head really spinning? Yes. There are certain assets that you can write off under section one 79 that you can't write off under bonus depreciation. Plus section one 79 gives you asset by asset control. So some expenses like some items are straight line and others. You might say, I want a more expense. Now let's do another example for let's, let's say that Carter is a doctor better yet. Let's say he's a dentist and is renting out an office that he's turning into his dental clinic because of what he's doing. Maybe he needs a better HVAC. Maybe he needs to some interior upgrades and maybe needs to fix up the roof to make sure that those HVACs can sit up there and assume that he finances everything. So let's just say Carter leases out the medical suite and he spends $300,000 on interior improvements. Let's say that he spends $180,000 to upgrade the HVAC and bolster the commercial roof, right? Now here's the strategy. Maybe you're using bonus for qualifying 20 year or less items and QIP qualified improvements on non-structural interior improvements. Use section one 79 specifically for the roof and HVAC systems. So we're targeting those items because section one 79 lets us reach it. Whereas one 68 K doesn't, but be mindful of the section one 79 limits, the 2.5 and the 4 million phase out and also whether or not you're creating a loss because you can lose it under section one 79 whereas you can use one 68 K to create losses. Now what is the result of this targeted use? Well, immediate deductions where bonus applies and section one 79 where bonus doesn't without triggering class wide bonus that you may not want on some of those items. So here's another new provision under the one big beautiful bill and that is the brand new 100% deduction for certain production buildings. And this is for manufacturers or producers and there's a new temporary 100% write off. This is crazy, right? For certain non-residential buildings used as an integral part of a qualified production activity. So think manufacturers, production facilities, refining that involves substantial transformation. It's for owner users only. So no leasing it to someone else to, you know, produce a big deduction and whether it's offices, admin, retailer, showrooms, lodging or parking, those don't qualify. There's a, there's also a 10 year use requirement and we're going to get more input under this type of a building because you get to write the whole thing off and then if you dispose of it too soon or change use too soon, there could be recapture. Right now we're looking at a 10 year period. So these are construction or acquisition windows and placed in service deadlines that you have to hit. So we'll know more as we go forward because this is new. If this is on your roadmap though, start your design and documentation now and separate eligible production areas from ineligible office admin retail places because like you can actually carve it out. So let's illustrate this via another story, right? So let's say that Ravi decides to revive a Rustbell plant. So Ravi acquires a long vacant food processing facility. Ravi modernizes it and begins production within the allowed window. He carves out some offices, some shipping, shipping areas, retail, maybe even parking lots, which is also not eligible for the deduction, but he keeps architectural documentation to substantiate the production square footage because it's the production area, the entire structure guys, not just the five, seven and 15, the entire building. And in that eligible production area, it can be 100% deducted in the year placed into service. So that's going to dramatically reduce taxable income in the startup year and freeing up cash for maybe hiring expansion. That's the intent and it's nice incentives for Ravi. But what about regular folks? You and me, right? We're just regular real estate investors, like just regular old landlords. What about doing like that cost sag plus a hundred percent bonus depreciation? Well, that will supercharge your first year deductions for sure. So let's say you, when you buy a commercial or residential rental, a cost segregation study can reclassify in a meaningful chunk of the property, right? I buy a building. Let's say I buy a, you know, let's say a rental property. What portion of that is five year property, seven year property, 15 year property. When you're, if you're spending new money, it's easy. But if you buy a brand new building, you take the non, uh, the, the land value out. So this would just be for non land areas. And it's usually about 30% of that amount that can be reclassified into five year, 15 year, you know, five to 15 year property. So those would be eligible for bonus right now. Boom. So let's use an example. Let's say, uh, Ava buys a duplex. She buys a $1 million duplex and let's just assume the land value of that duplex and there's ways to do this just off the assessor's page or you can get an appraisal, but let's just say it's 20%. That's about right. So that means there's $800,000 is her depreciable cost basis, whether she finances it or buys it on cash, right? A cost seg study, let's just say identifies about 30% as five, seven or 15 year components with bonus. She may deduct that 30%, which is 30% of 800,000 is $240,000 year one. She gets a big deduction that can help fund renovations. Maybe she gets some cash reserves, some debt coverage, whatever the case. When you see influencers talking about cost segs and bonus depreciation, you almost always hear them bring in the short term rental loophole or real estate professional status. And that's because they assume the deduction will be too big. Like these deductions are so big that they won't be able to just be used against the rents of the property and they want to offset other income. Like let's say Ava's just bought this duplex, right? What maybe she has a w two job or she has a spouse that has a bunch of income. So let's, let's just say Ava is netting $50,000 a year in positive cashflow from her $1 million duplex. It's not out of the ordinary with a $240,000 deduction. It will be close to five years before she has to pay any tax on that. That's powerful stuff. But if you can be a short term rental loophole, real estate professional, it would free it up and that extra 190,000 after offsetting the, the rents in year one could be used to offset w two income or other income that she has. So this is like powerful stuff, right? Now let's shift gears to cars, right? Pun intended, right? What we have to be careful of is business use and listed property, right? You need to make sure that you have 50% business use for both bonus depreciation section one 68 K for listed property and section one 79 period. If you drop below that 50% or below a business use threshold, you're looking at recapture, which means I'm recognizing that what I, what I took as a deduction as income to got to document your mileage. Please do it contemporaneously or you're going to, you're going to lose an audit, right? You got to track your mileage. Use an app. My like, use a pretty good one. It's just GPS is y'all over the place and you say what, but if you're trying to get that deduction, it's pretty powerful. Now for passenger auto automobiles, which is less than 6,000 pound gross vehicle weight, right? And also subject to luxury auto caps that limit first year depreciation and bonus. If you try to claim this bonus, the first year cap increases only by $8,000. It's still pretty low. So for example, if I buy a hundred thousand dollar car, you would be able to write off just over $20,000 in 2025 that's with bonus. If you simply reimburse mileage, for example, right now, it's 70 cents per mile that you can reimburse and assume you drive 30,000 miles for business. If you're really using that car a lot, right? You're going to get back $21,000 anyway, without having to worry about expensive commercial insurance. There's no 50% tests. There's no recapture. There's no added exposure to your business. So I always bring that up. I tend to use the mileage reimbursement method because with passenger cars quite often they go from business to personal use business to personal use, right? If that's you don't risk having that reclassification plus you're not getting a huge deduction anyway. But what about the stuff we hear about all the time? Heavy vehicles greater than 6,000 pounds gross vehicle weight. Well there's bonus depreciation and it's typically not subject to the luxury caps. So qualifying heavy vehicle that you use for more than 50% for business use can often be 100% bonus in year one up to the percentage that it is used for business. And this is a big point. Just because you use it for 60% for business does not mean that it's 100% deductible, right? A $100,000 heavy truck use 60% for business could give you a $60,000 deduction. Otherwise you're going to be taxed on the personal use of that vehicle. And the IRS puts out a chart every year on the value of the vehicle and how much you have to recognize as though the business paid you. So think of it like this. If I hired somebody and said, Hey, I'm going to let you drive around in my Ferrari, right? I don't actually have a Ferrari, but assume I had a Ferrari. Here's a Ferrari. You get to drive it. I'm paying somebody. There's that's compensation, right? And if you do it on your own business and you're, it's, Hey, it's 55% business, 45% there's going to be a tax hit. Just be aware, right? For section 179, many SUVs are over that 6,000 pounds and as long as they're under that 14,000 pound cap in under section 179, they're subject to a special cap for SUVs in 2025. This amount is 31,300. So every time I see, again, an influencer out there, I can section 179 my G wagon. Again, chances are you can, but there's limits and there's limits based on percentage of use and also a cap. Now here's the thing. A lot of people they're using pickups and cargo vans, things like that. If, if they have a, I think it's a greater than a six foot bed or it's a cargo van, they're not going to be treated as SUVs for that cap. And you can use the broader one sections section 179. In fact, there's a huge issue going on. Maybe I'll do a video on, on Tesla model Xs, right? And I actually drive one of those. But people that are trying to write those off, the IRS has gotten its wires crossed and they're messing around with people that actually do get that deduction. No, I'll do it on a separate video. So always use the gross vehicle weight rating from the manufacturer's label. Don't confuse it with the actual loaded weight. And I'm just going to say that because it matters under the tax law, what we are classifying and how we classify it. But bottom line, after everything we just went over, right? Bonus and one 79 both apply to vehicles, but the caps and categories differ, right? And keep business use greater than 50% know your gross vehicle weight and verify whether your vehicle is an SUV pickup or cargo van for section one 79 purposes. If that's what you're using. All right. You have enough knowledge now to be dangerous. So what are your next steps? Well, you should start mapping out your purchases, especially as you get towards the end of the year. If it's 20 year or less property, a hundred percent bonus is your default. Decide if you want to elect out for a class, uh, like the five or seven 15 year properties. So you can smooth out your deductions or do I just let it go? And then you can use section one 79 surgically for like roofs, HVAC, or just specific items. And keep in mind though, that you have some income limits and there is recapture risk. So know that if you're using something personal and business, be aware of that recapture risk. I've seen it really hammer people for manufacturers, start your design and permitting. Now separate eligible production areas and drawings plan for at least this 10 year qualified use. Again, we're going to get more feedback from the treasury at some point in the future. But as of right now, this looks like it's very tasty for those of you who are, you are doing manufacturing and production for real estate. If you are buying properties, duplex, single family apartments, anything that's just traditional real estate, consider doing a cost seg to unlock anything that's below 20 year property, the five, seven, 15 year components for bonus depreciation. And here's easy rule of thumb. If you're spending new money, just remember you don't need to do the cost seg cause you have the receipt. You already know the cost. If it's a property purchase, then consider doing a cost seg for vehicles. Verify your gross vehicle weight document greater than 50% business use and apply the correct bonus or section one 79 rules and caps. So you gotta have these little checklists. If you don't have that checklist, that's why people like Anderson exists, which you can always, again, go down in the comments and you put in there, Hey console, right? If this helped like, and subscribe and you know, again, reach out to Anderson. If you need help, I'm Toby Mathis. I'll see you in the next video.