Familiar with bonus depreciation? If not, here’s the short definition: Generally known as an *accelerated business tax deduction* that offers businesses the option to deduct a large percentage of certain asset costs at the time of purchase. A deduction that, in turn, lowers the business’s overall income tax liability.
Bonus Depreciation was launched in 2002, and it was designed to spur businesses to reinvest in themselves, primarily by buying big-ticket items needed in their operations. Common examples include large-scale office equipment, computer systems, and heavy machinery.
It’s been a much-used deduction that’s yielded substantial tax savings for many businesses. But, the program has begun to phase out and will be off the books by 2027.
The good news is that bonus depreciation is maxing out at 80% in 2023. Which makes the 2023 fiscal year the best time (since the 100% bonus depreciation that was available between 2017-2022) to take advantage of the deduction.
Here’s more on the program details, how to take advantage, and what to expect with the coming phase-out.
How Does Bonus Depreciation Work?
Regular depreciation allows businesses to deduct the cost of an eligible item’s purchase price annually as it progressively “loses value” over a 20-year lifespan.
With bonus depreciation, businesses can accelerate depreciation by writing off a significant percentage of certain assets’ costs in the year it’s purchased. After which, normal depreciation then takes over, and the remaining cost can be deducted until the item is fully “depreciated.”
The program was enacted by Congress’ Job Creation and Worker Assistance Act of 2002 to motivate businesses toward self-investment and stimulate the economy after the devastating 9/11 terrorist attacks.
2017’s Tax Cuts and Jobs Act (TCJA) modified bonus depreciation, empowering businesses to write off 100% of allowed items bought and used after Sept. 27, 2017, and before Jan. 1, 2023. Before this revision, bonus depreciation maxed out at 50%
What Items Qualify For Bonus Depreciation?
As you likely guessed, only certain assets qualify for bonus depreciation. Below is a basic outline of depreciable items:
- Following the Modified Accelerated Cost Recovery System (MACRS), eligible items must have a recovery period of 20 years or less. The most common examples include computer equipment and office furniture.
- Certain computer software systems.
- Water utility property.
- Qualified leasehold improvements property, such as interior remodeling and upgrades to nonresidential buildings. (Remodeling and upgrades only quality if executed at least three years after the building’s initial occupancy.)
- Production costs for some film, television, and live theatrical exhibitions.
- Vacation property used for short-term rentals, including Airbnb. Under TCJA, remodeling and upgrades to commercial properties used for short-term rentals may also qualify for bonus depreciation.
- Residential rental property that has been cost-segregated.
- Vehicles with a usable lifespan of 20 years or less.
- Used equipment never previously owned by the deducting business.
See more about eligibility requirements on the IRS FAQ page.
How Will Bonus Depreciation Be Phased Out?
Descending from the 100% bonus depreciation available between 2017-2023, the percentage will drop 20 points each year for purchases and used after Dec. 31, 2022, and before Jan. 1, 2027.* The schedule will roll out as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0
*It’s worth noting the law could change, with new legislation extending some aspect 0f the current depreciation program.
Questions About Bonus Deprecation?
Considering a major purchase for your business or remodeling your business facilities? Now is a smart time to act and take advantage of the potential tax savings.
If you have more questions about whether a potential purchase qualifies and how much tax savings it may yield – Get in Touch for a FREE Consultation!