The Tax Cuts and Jobs Act (TCJA) considerably boosted the potential worth of bonus depreciation for taxpayers, increasing the deduction to 100% within the 12 months certified property is positioned in service by way of Dec. 31, 2022. Starting 2023, the quantity drops every subsequent 12 months by 20 %, till bonus depreciation sunsets in 2027.
Deploy Earlier than 12 months-Finish
The placed-in-service requirement is especially essential for these wishing to say 100% bonus depreciation earlier than the utmost deduction quantity falls to 80 % in 2023. With the persevering with transport delays and shortages in labor, supplies, and provides, taxpayers ought to place their orders promptly to extend the percentages of having the ability to deploy qualifying property of their companies earlier than year-end.
Bonus depreciation has been obtainable in various quantities for a while. Instantly previous to the passage of the TCJA, taxpayers usually might declare a depreciation deduction for 50 % of the acquisition worth of certified property within the first 12 months—versus deducting smaller quantities over the helpful lifetime of the property underneath the modified accelerated value restoration system (MACRS).
Sure Property Enhancements, Tools, Equipment & extra
Companies can benefit from the deduction by buying, amongst different issues, property with a helpful lifetime of 20 years or much less. That features laptop methods, software program, sure automobiles, equipment, gear, and workplace furnishings. Certified Enchancment Property (QIP), comparable to inside enhancements to nonresidential property, excluding elevators, escalators, inside structural framework and constructing growth, additionally qualifies for bonus depreciation. A drafting error within the TCJA indicated in any other case, however the Coronavirus Support, Reduction, and Financial Safety (CARES) Act, enacted in 2020, retroactively made such property eligible for bonus depreciation.
Value-Segregation Finds Eligible Constructing Elements
Buildings themselves aren’t eligible for bonus depreciation, with their helpful lifetime of 27.5 (residential-rental) or 39 (business) years—however value segregation research may also help companies establish elements that may be. These research establish elements of actual property which might be tangible private property. Such property has shorter depreciation restoration intervals and due to this fact qualifies for bonus depreciation within the 12 months positioned in service.
Bonus Depreciation vs. Part 179 Expensing
Taxpayers generally confuse bonus depreciation with Part 179 expensing. The 2 tax breaks are comparable, however distinct. Like bonus deprecation, Part 179 permits a taxpayer to deduct 100% of the acquisition worth of recent and used eligible belongings. Eligible belongings embody software program, laptop and workplace gear, sure automobiles and equipment, in addition to certified enchancment property. However Part 179 is topic to some limits that don’t apply to bonus depreciation. For instance, the utmost allowable deduction for 2022 is $1.08 million.
As well as, the deduction is meant to learn small- and medium-sized companies so it begins phasing out on a dollar-for-dollar foundation when qualifying property purchases exceed $2.7 million. In different phrases, the deduction isn’t obtainable if the price of Part 179 property positioned in service this 12 months is $3.78 million or extra.
At first look, bonus depreciation can look like a no brainer. Nonetheless, it’s not essentially advisable in each scenario. For instance, taxpayers who declare the certified enterprise revenue (QBI) deduction for pass-through companies might discover that bonus depreciation will not be very best. The quantity of your QBI deduction is proscribed by your taxable revenue, and bonus depreciation will cut back this revenue. Like bonus depreciation, the QBI deduction is scheduled to run out in 2026, so that you would possibly need to think about maximizing it earlier than then.
Different Taxable Revenue Deductions
The QBI deduction isn’t the one tax break that will depend on taxable revenue. Growing your depreciation deduction additionally might have an effect on the worth of expiring internet working losses and charitable contribution and credit score carryforwards. And deduction acceleration methods ought to think about tax bracket expectations going ahead. The worth of deductions is greater while you’re topic to greater tax charges.
Purchase Now, Resolve Later?
If you happen to plan on buying bonus depreciation qualifying property, it might be clever to put it in service earlier than the top of the 12 months to maximise your choices.
Kelvin Tetz, CPA, companion, leads the Moss Adams Actual Property Follow and has practiced public accounting since 1998.