One of the most significant provisions of the Tax Cuts and Jobs Act (TCJA) was bonus depreciation for qualified property placed into service between Sept. 28, 2017, and Dec. 31, 2026. The 100% bonus depreciation on the various assets considered “qualified property” has since expired, but there’s still time to claim significant benefits for 2024 and later. Unless Congress enacts new tax law changes, the bonus percentage will decrease by 20% 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 commercial buildings are eligible for accelerated cost recovery.
The key to eligibility for any of these bonus depreciation percentages is ensuring that the assets are “placed in service” prior to specific deadlines. It’s not enough to have simply purchased qualified property prior to Dec. 31, 2024. In order to qualify for 60% 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.
Cost segregation and bonus depreciation
One way to increase the value of bonus depreciation is to use a cost segregation study to accurately categorize components of buildings into asset classes that have recovery periods of 20 years or less, making them eligible for the appropriate bonus depreciation percentage 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 Section 179 rules. However, those can be less attractive than the current bonus depreciation allowances, due to the sometimes-significant limitations in place in order to claim deductions under this provision. Under Sec. 179, businesses are subject to total purchase rules and total deduction rules every year, which place limitations on the amount of first-year depreciation when compared with the bonus depreciation rules.
Benefits reduced after 2024
Businesses that may be contemplating significant fixed asset purchases in the future should understand that time is of the essence. The ability to deduct 60% of a qualifying large asset’s cost in the year of acquisition can generate significant tax savings (possibly even refunds) and simplify depreciation recordkeeping. Even the relatively small decrease from 60 to 40% deductibility can significantly impact the current bottom line, as well as the information that must be tracked for depreciation deductions in the future.
Keep in mind that the amount of bonus depreciation your asset qualifies for depends on the rules in place for that tax year. For example, if you placed a building into service in 2023 but don’t implement a cost segregation study until 2024, your asset would still qualify for 80% bonus depreciation when your method change is filed, even though bonus depreciation in 2024 is reduced to 60%.
With a high likelihood of tax law changes coming in 2025, and bipartisan support for bonus depreciation, we may see some upcoming changes to the bonus depreciation rules in the coming months.
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