Changes Ahead for Bonus Depreciation by Joshua P. Heberling, CPA
Companies considering a purchase of certain tangible business assets may want to accelerate those acquisitions in 2022 before they lose the full benefit of 100 percent bonus depreciation, which will begin phasing out at the end of the year.
Under the Tax Cuts and Jobs Act passed into law in 2018, businesses gained the ability to write off 100 percent of the costs they incur for new or used qualifying property they purchase or finance and put into service after Sept. 27, 2017. This means businesses could recover all their acquisition costs in the year of purchase rather than taking depreciation deductions over the useful life of those assets.
This changes on Jan. 1, 2023, when the eligible rate of depreciation is scheduled to decrease to 80 percent and continue declining by 20 percent each subsequent year until it phases out completely after Dec. 31, 2026. The full depreciation schedule is as follows:
- Property placed in service in 2023: 80%
- Property placed in service in 2024: 60%
- Property placed in service in 2025: 40%
- Property placed in service in 2026: 20%
- Property placed in service in 2027: 0
Assets qualifying for bonus depreciation include new or used tangible property with a recovery period of 20 years or less, such as equipment, machinery, furniture, fixtures and vehicles. The law also applies to 15-year qualified improvement property (QIP), which refers to improvements made to the interior of nonresidential buildings after those properties open for business. Specifically excluded from the definition QIP are building enlargements, elevators and escalators, and any internal structural framework.
No discussion about bonus depreciation is complete without considering what the tax code refers to as “Section 179” property, which includes tangible business assets, QIP and certain improvements to nonresidential property, such as roofing, HVACs and alarms, security and fire protection systems. Similar to bonus depreciation, Section 179 allows businesses to elect an immediate first-year expense deduction for the purchase or financing of qualifying property rather than capitalizing and depreciating those assets over time. However, unlike bonus depreciation, the IRS limits the amount businesses may elect to deduct as Section 179 property in a tax year. For example, the maximum deduction that can be claimed for Section 179 property in 2022 is $1.080 million on property costing a total of less than $2.7 million. When a business’s total investment in qualifying property for the year exceeds that threshold, the amount it may deduct is reduced dollar-for-dollar. Additionally, the law limits the deduction to a business’s taxable income for the year.
The good news is that businesses may rely on both bonus depreciation and the Section 179 property deduction rules to recover the costs to acquire qualifying property. However, with the clock ticking to the end of 2022, it behooves businesses to consider whether it makes sense to delay an asset purchase or complete it in the current year to enjoy the benefit of 100 percent depreciation.
About the Author: Joshua P. Heberling, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he focuses on tax planning and compliance services for high-net-worth individuals and businesses in the commercial real estate, land development and office-market industries. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.
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