February 15, 2023
Since 2017, businesses have taken advantage of 100% bonus depreciation on qualified assets. As part of the Tax Cuts and Jobs Act, 100% of the cost of certain assets could be written off in the year the assets were placed in service. This tax incentive was created to encourage businesses to invest in new machinery and equipment. 2022 was the last year to take advantage of this at 100%, as with the currently approved legislation it will begin dropping in 2023 until it reaches 0% in 2027.
While regular depreciation will still be available to businesses, the phase out of the 100% bonus depreciation is scheduled to drop 20% each year.
- 80% for qualified assets placed in service in 2023.
- 60% for qualified assets placed in service in 2024.
- 40% for qualified assets placed in service in 2025.
- 20% for qualified assets placed in service in 2026.
- 0% for qualified assets placed in service in 2027, and later years.
To qualify for bonus depreciation the asset must be a new purchase to the owner, although it may be used equipment or machinery. The qualified assets are also limited to those that use the MACRS depreciation schedules, with less than 20-year schedules; it excludes residential and commercial property. Bonus depreciation is only taken in the year the asset was placed into service, not when it was purchased.
In addition to regular depreciation, the Section 179 deduction will still be available. The Section 179 depreciation is similar to bonus depreciation in the way it allows the expensing of many business asset purchases; however it is limited. For 2022 the limit is $1,080,000, and there is a phase-out that starts when the qualified assets exceed $2.7M. Also, the Section 179 deduction cannot result in a tax loss like the bonus depreciation can. Additionally, Section 179 rules can garner a very different outcome than bonus depreciation at federal and state levels, so knowing how each of these will impact your specific tax situation is imperative.
Businesses that have used bonus depreciation will need to meet with their advisor to strategize how this change will impact their tax situation moving forward. Lowering your tax bill should not be done at the expense of higher tax bills for years to come, so careful tax planning is a must.