News & Insights

As the old adage says, “all good things must come to an end.” Once a valuable tax break, bonus depreciation — definitely a good thing for business of all scopes and sizes — will begin to phase out on Dec. 31, 2022.

According to the Internal Revenue Service (IRS), bonus depreciation allows business taxpayers to deduct additional depreciation for the cost of qualifying business property, beyond normal depreciation allowances — encouraging capital purchases.

Prior to 2017, businesses could only write off 50% of a given asset. But as part of the Tax Cuts and Jobs Act (the “Act”) enacted in December 2017, businesses have been allowed one hundred percent (100%) bonus depreciation on qualified assets, including software, computer and office equipment, eligible vehicles, machinery and furniture as well as improvement property. Now qualifying property is getting only 80% bonus deduction in 2023 and less in later years. Certain assets need to be used for business for more than 50% of the time to qualify, including items such as vehicles and photography equipment that could be used for non-business purposes.

One of the unique provisions found in the Act was that bonus depreciation applied not only to new, but used, property. Previously, only new assets were eligible for bonus depreciation.

Like most of the tax cuts found in the Act, bonus depreciation phases out at the end of this year with annual reductions as follows:

• Eighty percent (80%) for property placed in service in 2023;
• Sixty percent (60%) for property placed in service in 2024;
• Forty percent (40%) for property placed in service in 2025;
• Twenty percent (20%) for property placed in service in 2026, and
• zero thereafter.

This means that most businesses interested in the maximum deduction by purchasing either new or used assets will want to do so quickly — before the end of the year. Many clients who have gain or boot from Section 1031 exchanges have found that if they use that boot to acquire or improve depreciable assets, the bonus depreciation deductions on those assets can completely or partially offset any boot or gain.

As bonus depreciation perks diminish over the coming years, businesses will still have the benefit of the Section 179 deduction, which like bonus depreciation, allows for deductions of business assets. However, unlike bonus depreciation which has no dollar limit, Section 179 is limited to assets with a value of $1.08 million in 2022 and there is a phaseout of the deduction once the purchase of qualified assets exceeds $2.7 million. Also unlike bonus depreciation, Section 179 deductions cannot result in a tax loss and can only reduce taxable income. Additionally, businesses cannot use the entire bonus depreciation amount if the Section 179 business deduction has been used — although they can be combined if businesses apply section 179 first, followed by bonus depreciation.

Regular depreciation will continue to be available without limits in phaseouts but most businesses don’t care for the long depreciative lives from regular depreciation.

Going forward, although bonus depreciation is the first of the tax benefits being reduced or phased out, it is by no means the last. The laws are ever-evolving and taxpayers anticipate that C Corporation tax rates may go up and exemptions for gift and estate taxes will go down in the near future.

Given the current division of power in Congress, prospects of future tax relief legislation may be bleak until after the 2024 elections.

Phil Jelsma is a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3). The article is published in The Daily Transcript (subscriber only).