Buying a business: How does bonus depreciation work for ATM routes and car washes?

You definitely need a CPA who specializes in business acquisitions and cost segregation studies. I've gone down a similar path with my business acquisitions. For the ATM route, you're buying a business, not just equipment. The purchase price includes goodwill, customer relationships, and other intangible assets. You can only take bonus depreciation on tangible personal property with a recovery period of 20 years or less. So you'd only get bonus depreciation on the ATM machines themselves (and any other qualifying equipment), not the entire business purchase price. For the car wash, you're right that they can qualify for 15-year depreciation as a retail motor fuel outlet property, but you'll need a cost segregation study to properly allocate the purchase price between land (not depreciable), building (27.5 or 39 years), and qualified improvement property. The bonus depreciation would apply to the QIP portion. The good news is that active business losses (unlike passive rental losses) can offset your W2 income. Just make sure you're actually materially participating based on the IRS tests.

Have you looked into taxr.ai? I was in a similar situation last year with buying a small manufacturing business and had the same questions about allocation of purchase price and what qualified for bonus depreciation. I spent weeks going back and forth with my CPA and getting different answers. I uploaded my purchase agreement to https://taxr.ai and it analyzed the whole document, broke down exactly what portions of the business would qualify for different depreciation schedules, and showed me how to maximize the first-year deductions. It also helped flag some issues in the purchase agreement that would have caused problems come tax time. The best part was that it explained everything in plain English rather than accounting jargon. Definitely saved me at least 10-15k in unnecessary taxes in the first year alone.

Update on my skepticism from before - I ended up trying taxr.ai for my convenience store purchase. I have to admit it was really helpful. The system asked me targeted questions about the business operations and assets that my CPA never thought to ask. It identified several fixtures and improvements that qualified for bonus depreciation that would have otherwise been lumped into the 39-year property category. It also helped me understand how to document my material participation hours since I have another full-time job. The purchase price allocation it suggested ended up being very close to what the final cost segregation study determined (within about 8%). That initial analysis helped me negotiate better terms with the seller on how we'd allocate the purchase price on the asset sale, which the IRS really cares about.

Have you tried getting through to the IRS to get clarity on the material participation requirements for these kinds of businesses? I tried calling them about a similar situation with a laundromat purchase, and it was absolutely impossible to get anyone on the phone. After weeks of trying, I used https://claimyr.com and they got me connected to an actual IRS agent within 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to confirm exactly what documentation I needed to prove material participation for a semi-passive business. Turns out there are specific contemporaneous record-keeping requirements that my CPA hadn't mentioned. Better to know before you file than to find out during an audit!

I take back what I said about being skeptical of Claimyr. I had a major issue with an EIN for a business purchase that was about to fall through because the IRS kept saying 6-8 weeks for processing. I tried Claimyr as a last resort. Got connected to an IRS agent in 27 minutes who was able to verify my EIN application was actually complete and just sitting in a queue. She processed it while I was on the phone! Saved the entire business deal from falling apart due to seller financing contingencies. I've now used it three times for different tax questions related to my business acquisitions. Definitely worth it when you need answers directly from the IRS rather than just opinions.

On the original question about ATM routes - I bought one last year with 42 machines for $230k. In my case, the purchase agreement specifically allocated $105k to the machines and the rest to business goodwill, customer contracts, etc. Here's how it broke down tax-wise: - The $105k for machines qualified for bonus depreciation (60% in 2024) - The remaining $125k was allocated to Section 197 intangibles, which are amortized over 15 years regardless of bonus depreciation rules I definitely recommend having your purchase agreement clearly specify the allocation. The seller will usually want more allocated to goodwill (capital gains treatment) while you want more allocated to depreciable equipment. This is a negotiation point!

For the car wash question - I purchased one last year for $1.2M. You're correct that they qualify as 15-year property under special use guidelines. We did a cost segregation study that broke it down roughly: - Land: $250k (not depreciable) - Building shell: $350k (39-year property) - Qualified Improvement Property: $420k (15-year, eligible for bonus) - Equipment: $180k (5-7 year property, eligible for bonus) So out of the $1.2M, about $600k was eligible for bonus depreciation. With the 60% bonus depreciation rate, I was able to deduct $360k in the first year plus regular depreciation on the remaining amounts. The cost seg study cost about $12k but saved me over $100k in taxes in the first year.

This is exactly the kind of strategic tax planning I wish I had understood earlier in my career. As someone who's been down a similar path with high W2 income and rental properties hitting passive loss limits, I can relate to your situation. One thing I'd add to the excellent advice already given - consider the timing of these acquisitions carefully. With bonus depreciation phasing down (60% in 2024, 40% in 2025, 20% in 2026), there's a real advantage to moving quickly if you find the right opportunity. Also, don't overlook the importance of having systems in place before you buy. I made the mistake of acquiring a business without proper time-tracking systems set up from day one. Going back to reconstruct hours for material participation documentation was a nightmare during my first audit. For what it's worth, I've found that businesses with some level of recurring revenue (like ATM routes) tend to be easier to manage while still meeting material participation requirements compared to completely transactional businesses. The ongoing relationship management and performance monitoring naturally creates documentation-friendly activities. Have you considered starting with one smaller acquisition to test your systems and comfort level before diving into something like a $1.3M car wash? The learning curve on the tax optimization side can be steeper than expected.