The TCJA 100% bonus depreciation starts to phase out after 2022
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 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 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 strategies can recover costs sooner and improve your business’s cash flow, contact your Plante Moran advisor.
