Temporary 100% “Bonus Depreciation” Decreases by 20% Per Year Starting in 2023

If you were planning to buy equipment anyway, DO IT NOW to take advantage of the 100% depreciation deduction!

The Tax Cuts and Jobs Act (TCJA) temporarily allowed 100% expensing for business property acquired and placed in service after September 27, 2017, and before January 1, 2023.

The IRS has recently changed laws relating to deductions, depreciation, and expensing. We are focusing specifically on “Bonus Depreciation,” otherwise known as the first-year bonus depreciation.

The Tax Cuts and Jobs Act Rulings on Depreciation

What’s depreciable?

• The 100% depreciation deduction applies to depreciable business assets and other property, as defined by the IRS.
• Equipment, computers, machinery, appliances, and furniture usually qualify.
• The deduction is retroactive for qualifying property acquired and placed in service after September 27, 2017.

Changed maximums and new definitions

• The TCJA increased the maximum for depreciable business assets to $ 1 Million and boosted the phase-out threshold to $2.5 Million.
• The definition of section 179 property was changed. It now allows taxpayers to include certain upgrades to nonresidential real property.

Takeaways and Adds

• The TCJA has removed computer or peripheral equipment from the definition of listed property.
• This ruling increased depreciation limits for passenger vehicles.
  • Specifically, if the taxpayer does not claim the bonus depreciation, the greatest allowable depreciation deduction is:
    • $10,000 for the 1st year,
    • $16,000 for the 2nd year,
    • $9,600 for the 3rd year, and
    • $5,760 for each subsequent taxable year in the recapture period.
  • Heavy vehicles over 6,000 pounds escape these limits for passenger vehicles otherwise considered to be luxury autos. This can result in 100% bonus depreciation if placed in service by 12/31/22.

TCJA Note: If the taxpayer claims the 100% bonus depreciation, the highest allowable depreciation deduction will be $18,000 for the first year and then the same as above for the following years.

Real Property Depreciation Changes:

The general depreciation system recovery periods remain at 39 years for nonresidential real property. The recovery periods are still 27-1/2 years for residential rental property. Nonresidential real property’s alternative depreciation system recovery period is still 40 years. However, for residential rental property, the TCJA is altering the alternative depreciation system recovery period down from 40 years to 30 years. Keep in mind that qualified leasehold improvement property, retail improvement property, and restaurant properties are no longer separately defined and given a special fifteen-year recovery period according to the new law.

CONCLUSION:

The IRS made lots of changes to help businesses starting in 2017. The 100% first-year bonus depreciation is one of those, but it will end on December 31, 2022, being phased out through 20% per year decreases, expiring on January 1, 2027.

We at LSL CPAs want to ensure you’re taking advantage of this tax event with the assurance that the items you need to buy will be allowable.  If you’re thinking of making a purchase before year end and not sure if your purchase will qualify or you’re unsure how that impacts your situation, contact your LSL advisor.