January 3, 2024
Bonus Depreciation Phase Out
When businesses purchase eligible property such as equipment, there are two options available to allow them to accelerate book depreciation, rather than write the asset off over the useful life. Under Section 179 of the Internal Revenue Code (IRC), the business may expense the entire cost of that piece of property in the year of acquisition, up to $1,220,000 in 2024, thus lowering the business’ taxable income. However, Section 179 depreciation cannot be applied in a year the business incurs a taxable loss, and would require a carry-forward.
As an alternative, a business may elect what is known as “bonus depreciation.” Bonus depreciation is a product of the Tax Cuts and Jobs Act of 2017 and allows businesses to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017 and before January 1, 2023. This is known as 100% bonus depreciation, it differs from the 179 deduction since the business is still eligible if they are operating at a loss. In addition, there is no limit on the amount of bonus depreciation a business may take in a given year. While the 100% write-off expired at the end of 2022, the bonus depreciation incentive still exists in some capacity as scheduled below:
- Property placed in service in 2023 is eligible for 80% bonus depreciation.
- Property placed in service in 2024 is eligible for 60% bonus depreciation.
- Property placed in service in 2025 is eligible for 40% bonus depreciation.
- Property placed in service in 2026 is eligible for 20% bonus depreciation.
This is a great tax planning opportunity for individuals who are partners/shareholders in a business that typically operates at a loss and are planning significant fixed asset acquisitions over the next few years. These individuals should try to accelerate any major asset purchases in order to be able to receive the maximum amount of bonus depreciation as it continues to wind down each subsequent year. Business owners who typically take advantage of bonus depreciation should be aware of this phase-out in order to avoid oversight on projected loss calculations for the next few years. Examples of common industries that may be affected by these changes include the manufacturing, rental real estate, and the agricultural industry. In addition, be sure to verify with your tax professional in regards to your State’s conformity with the Tax Cuts and Jobs Act as it relates to bonus depreciation.