First established with the Job Creation and Worker Assistance Act of 2002, bonus depreciation has been a mainstay in the tax code for years since. More recently, The Tax Cuts and Jobs Act (TCJA) of 2017 made some significant changes to bonus depreciation, namely, increasing the percentage allowed to 100% and qualifying used property. These two changes allowed businesses to dramatically boost tax savings, improve cash flow, invest in new assets, and retain their competitive advantage in a tumultuous economy.
Authorized by the TCJA, Section 168(k) allows for additional first-year depreciation, commonly referred to as bonus depreciation, for qualified property placed in service after September 27, 2017. The bonus depreciation amount is 100% of the asset’s cost, but this allowed depreciation percentage reduces by 20% each year starting in 2023. While we have entered this stage of decreasing benefits, there continue to be important strategies for maximizing deductions via the use of bonus depreciation.
What kind of property qualifies for bonus depreciation?
Generally speaking, bonus depreciation applies to purchased depreciable business assets, new or used, with a recovery period of 20 years or less and placed in service after September 27, 2017. This includes tangible personal property, including computers, machinery, equipment, certain improvements, furniture, etc., and generally does not include real property, such as commercial or residential buildings. While bonus depreciation is not available related to a commercial or residential building, there typically is plenty of tangible personal property within these buildings that will be eligible. This personal property is most often identified via a cost segregation study.
How does bonus depreciation change in 2023 and beyond?
The deduction amount of bonus depreciation will go from 100% to 80% for qualified property placed in service after December 31, 2022, and before January 1, 2024. This 20% annual reduction continues until bonus depreciation has gone away at the end of 2026. See the table below for the full breakdown:
Other depreciation considerations
Once bonus depreciation is gone, traditional methods of depreciation will need to be used, and IRC Section 179 depreciation will need to be more often considered. Like all things tax-related, when considering whether to use bonus depreciation, IRC Section 179 depreciation, or whether to have a cost segregation study performed, please consult with a qualified tax professional like those at Perkins & Co.