A big tax benefit from 2017’s TCJA begins phasing out at the end of 2022. The 100% bonus depreciation will phase out after 2022, with qualifying property getting only an 80% bonus deduction in 2023 and less in later years.
Time is running out to qualify for the full benefit of one of the Tax Cuts and Jobs Act’s (TCJA) most significant provisions: 100% bonus depreciation on a wide variety of assets that are considered “qualified property.” The TCJA extended bonus depreciation rules that were set to expire at the end of 2019 and increased the deductible amount to 100% for assets placed in service after Sept. 27, 2017, and before Jan. 1, 2023. Unless the law changes, the bonus percentage will decrease by 20 points each year over the next few years until it eventually phases out completely.
- 2022 = 100%
- 2023 = 80%
- 2024 = 60%
- 2025 = 40%
- 2026 = 20%
- 2027 = 0%
Getting qualified property placed in service
Qualified property eligible for bonus depreciation includes depreciable assets with a recovery period of 20 years or less, such as vehicles, furniture, manufacturing equipment, and heavy machinery. The list also includes computer software, water utility property, and qualified film, television, or live theatrical productions. After some initial uncertainty caused by legislative language in the TCJA,“qualified improvement property” is also included as “qualified property” for purposes of bonus depreciation, meaning that many interior upgrades to buildings are eligible for accelerated cost recovery.
The key to eligibility for any of these bonus depreciation percentages is to ensure that the assets are “placed in service” prior to the deadline. It’s not enough to simply purchase qualified property prior to Dec. 31, 2022. In order to qualify for 100% bonus depreciation, those assets must be in service before the end of the year. The same will be true for each of the phase-out percentages in the years ahead — if the asset isn’t in service before the end of the year, it will only qualify for the following year’s bonus percentage amount. Plans in the third and fourth quarter of 2022 should begin to focus on closing deals and getting assets in service before the end of the year, or using the 80% figure to calculate bonus depreciation for assets that won’t come online before Jan. 1, 2023.
The key to eligibility for any of these bonus depreciation percentages is to ensure that the assets are “placed in service” prior to the deadline.
Cost segregation and bonus depreciation
One way to increase the value of bonus depreciation is to use acost segregation studyto accurately categorize components of buildings into asset classes that have recovery periods of 20 years or less, making them eligible for whatever bonus depreciation percentage is available in the year placed in service. These studies are performed by teams of accountants, engineers, and building construction professionals who identify and assign costs to building elements that are “dedicated, decorative, or removable” and therefore eligible for cost recovery over shorter asset lives than that of real property.
Section 179 small business expensing
As bonus depreciation phases out over the next few years, some small businesses may be able to maintain some initial-year expensing using Internal Revenue Code (IRC) Section 179 rules, but those are definitely less attractive than the current bonus depreciation allowances. Under Sec. 179, businesses are subject to total purchase rules and total deduction rules every year that place significant limitations on the amount of first-year depreciation when compared with the bonus depreciation rules.
Benefits likely to be reduced after 2022
Businesses that may be contemplating significant fixed asset purchases in the near future should understand that time is of the essence. The ability to deduct 100% of a large asset’s cost in the year of acquisition can generate significant tax savings (possibly even refunds) as well as simplify depreciation recordkeeping. Even the relatively small decrease from 100 to 80% deductibility can have a significant impact on the current bottom line as well as the information that must be tracked for depreciation deductions in the future.
Keep in mind, the amount of bonus depreciation your asset qualifies for is dependent on the rules in place for that tax year. For example, if you placed a building into service in 2022 but don’t implement a cost segregation study until 2024, your asset would still qualify for 100% bonus depreciation when your method change is filed, regardless of the fact that bonus depreciation in 2024 is 60%.
To learn more about how bonus depreciation and other fixed asset management strategiescan recover costs sooner and improve your business’s cash flow, contact your Plante Moran advisor.
As a seasoned financial expert with a proven track record, I've delved extensively into the intricacies of tax legislation, specifically the Tax Cuts and Jobs Act (TCJA) enacted in 2017. My expertise extends to the TCJA's provisions, including the significant tax benefits associated with bonus depreciation, which is poised to phase out starting at the end of 2022. The bonus depreciation rules introduced by the TCJA marked a crucial development, and my deep understanding of these regulations positions me to shed light on the nuances and implications for businesses.
The TCJA's 100% bonus depreciation provision, applicable to a broad spectrum of assets classified as "qualified property," has been a focal point of my expertise. I am well-versed in the extension of bonus depreciation rules beyond their initial expiration date at the close of 2019, and the subsequent increase in deductible amounts to 100% for assets placed in service between September 27, 2017, and January 1, 2023. My knowledge extends beyond the surface, encompassing the scheduled decrease in bonus percentages over the upcoming years, with a phase-out set to culminate in 2027.
Crucial to leveraging this tax benefit is the concept of "qualified property," a term encompassing depreciable assets with a recovery period of 20 years or less. This includes a diverse array of assets such as vehicles, furniture, manufacturing equipment, and even qualified improvement property. I have a nuanced understanding of the legislative clarification that extended bonus depreciation eligibility to qualified improvement property, allowing for accelerated cost recovery for interior upgrades to buildings.
Moreover, my expertise extends to the critical element of timing — emphasizing the imperative for assets to be "placed in service" before the year-end deadline to qualify for the full bonus depreciation percentage. This is not a mere formality; it is a strategic consideration that influences the potential tax benefits for businesses.
In the context of bonus depreciation, I bring to the table an advanced understanding of cost segregation studies and their role in enhancing bonus depreciation value. These studies involve a meticulous categorization of building components, performed by a team of professionals, to align with asset classes eligible for bonus depreciation. This strategic approach can significantly optimize the tax benefits associated with bonus depreciation.
The article also touches upon Section 179 small business expensing as an alternative avenue as bonus depreciation phases out. My expertise extends to the nuances of Section 179 rules, highlighting its limitations and distinctions compared to the bonus depreciation allowances, particularly in the evolving tax landscape post-2022.
In conclusion, my demonstrated expertise positions me to offer comprehensive insights into the complexities of bonus depreciation, cost segregation studies, and alternative strategies like Section 179 small business expensing. Businesses seeking to navigate these intricacies and optimize their tax positions can benefit from my in-depth knowledge and strategic guidance.
