Businesses and business owners have been able to use bonus depreciation in varying amounts for some time. For many years, this form of accelerated depreciation has provided incentive for businesses to invest in new equipment and property while simultaneously enjoying tax advantages.

The Tax Cuts and Jobs Act (TCJA) of 2017 initially allowed taxpayers to claim a depreciation deduction of 100% of the purchase price on qualifying property instead of deducting smaller amounts each year over the useful life of the property. Qualified property includes assets with a recovery period of 20 years or less, depreciable computer software, and qualified improvement property. This applies for new and used assets if the taxpayer has not previously used the acquired property or received it from a related party. Beginning on January 1, 2023, bonus depreciation has begun to phase out over the next four years, as follows:

• 2023 (1/1/23 – 12/31/23) – 80% bonus depreciation allowed
• 2024 (1/1/24 – 12/31/24) – 60% bonus depreciation allowed
• 2025 (1/1/25 – 12/31/25) – 40% bonus depreciation allowed
• 2026 (1/1/26 – 12/31/26) – 20% bonus depreciation allowed

Without any new legislation, bonus depreciation will be completely phased out starting on January 1, 2027.

However, there is still an opportunity to accomplish the same goal as 100% bonus depreciation by electing Section 179 on your qualified property. Section 179 is set to remain the same throughout the bonus phase out but comes with its own set of limitations. Section 179 allows for the immediate expensing of 100% of the asset cost up to $1,160,000 for 2023. The full deduction can be taken unless the total equipment purchases are greater than $2,890,000 for the tax year, in which case the deduction will reduce dollar for dollar by the amount above the threshold. The deduction will also only apply if the business is profitable as it cannot be used to create a tax loss. Section 179 may be more flexible than bonus depreciation, as it allows the taxpayer to take the deduction on specific assets rather than an entire class of assets.

Each form of accelerated depreciation has state implications. Different states may or may not conform to the Federal guidelines. Many states in the area do not allow the bonus depreciation expense that is available at the Federal level and have also placed their own limitations on Section 179 expensing. State legislation will be an important factor when determining the benefits between bonus depreciation and Section 179. The chart below provides a summary of state conformity:

State:	Bonus Depreciation	Section 179
Maryland	Not allowed	Expense capped at $25,000; Phase-out threshold of $200,000
Virginia	Not allowed	Follows Federal
District of Columbia	Not allowed	Expense capped at $25,000

 

There are many complications that can arise when tax planning for the future. Be sure to discuss with your tax advisor these potential tax planning strategies and see if your business will be impacted by the bonus depreciation changes. Please reach out to Snyder Cohn if you have any questions.

 

By: Matthew DeLong