The tax world is ever-changing with our complex set of laws, oftentimes yearly. That is why it’s important to stay on top of the latest changes. In this article, I wanted to set the stage for some key changes/provisions that will impact your real estate business: meals, mileage rates, and bonus depreciation.
Meals
In the past, you’d be able to deduct 50% of meals and entertainment (pre-2018). Since then, you’ve only gotten to deduct your meals for 50% of the cost. In 2021 and 2022, the deduction is a full 100%, meaning you can deduct the full cost of your meals, provided they are for business purposes. As a reminder, make sure to document the business purpose and who you met with.
Mileage Rate
The IRS mileage rate changes its mileage rate yearly. There was a slight decrease from $.575 per mile to .56 per mile. Make sure to note the business purpose as well for claiming deductions for mileage. Commuting expenses are not deductible (i.e. to and from your rental property). Only expenses once you’ve gotten to the rental property are deductible (generally speaking).
Bonus Depreciation
This is not a new provision within the tax code, merely a reminder that this exists. For an explanation of what bonus depreciation is, see my previous article here and scroll down to the “Bonus Depreciation” section. It is important to note that while this is a powerful strategy to reduce income, it may not make sense in all cases to use it. You will want to speak with your tax advisor to determine if this is right for you and your overall goals.
Nonetheless, you can potentially write off 100% of the cost of a qualifying asset (see previous link for what a qualifying asset is) you place into service until 12/31/2022. Each year thereafter, you can take 20% less bonus depreciation than the previous year. See below:
2023: 80% bonus depreciation
2024: 60% bonus depreciation
2025: 40% bonus depreciation
2026: 20% bonus depreciation
Wrapping it Up
Keeping abreast of the recent changes in tax law is crucial for your real estate business. Knowing the above, you could potentially save significant dollars on your taxes. These three items are important to know for when you speak to your tax advisor in 2021.
If you have questions on your real estate tax strategy, you can reach me (Aaron Zimmerman) at aaronz@thethinkers.com.
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