Bonus Depreciation: Analysis for 2023

The concept of Bonus Depreciation has been a vital part of taxation laws and has played a significant role in encouraging businesses to invest in new properties and equipment. The Tax Cuts and Jobs Act of 2017 brought significant changes to the laws surrounding bonus depreciation, which continue to be in effect for 2023.

Understanding the Concept of Bonus Depreciation

Bonus Depreciation is a method of accelerated depreciation that provides incentives for businesses to purchase new equipment and property. It allows taxpayers to deduct a substantial portion of the purchase price of qualifying property in the year of purchase rather than deducting smaller amounts over several years.

Changes Introduced by the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to the laws surrounding Bonus Depreciation. Prior to the TCJA, businesses could claim a certain percentage of the purchase price on qualifying property. The TCJA expanded this provision to allow taxpayers to claim a depreciation deduction of 100% of the purchase price on qualifying property, including new and used assets, under certain conditions.

Phasing Out of Bonus Depreciation

However, from January 1, 2023, bonus depreciation has begun to phase out over the next four years. The percentage of bonus depreciation allowed will decrease yearly until it is completely phased out on January 1, 2027, unless new legislation is introduced.

The schedule for the phasing out of bonus depreciation is 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

Understanding Section 179

In addition to Bonus Depreciation, businesses can also utilize Section 179 of the Internal Revenue Code. Section 179 allows businesses to expense the full purchase price of qualifying equipment and/or software purchased during the tax year. The TCJA raised the deduction limit under Section 179 to $1 million and the phase-out threshold to $2.5 million, with adjustments for inflation each year.

Comparing Bonus Depreciation and Section 179

Both Bonus Depreciation and Section 179 provide businesses with tax incentives for purchasing new equipment and property. However, there are some key differences between the two.

Section 179 allows for the immediate expensing of 100% of the asset cost up to a certain limit. In contrast, Bonus Depreciation allows for a certain percentage of the purchase price to be deducted. Additionally, Section 179 can only be used if the business is profitable, as it cannot be used to create a tax loss. On the other hand, Bonus Depreciation can be used even if the business is not profitable.

State Conformity with Bonus Depreciation and Section 179

While the Federal government has set specific guidelines for Bonus Depreciation and Section 179, it is essential to note that individual states may or may not conform to these guidelines.

Different states have different laws regarding Bonus Depreciation and Section 179, and it is essential for businesses to understand the specific laws in their state.

Conclusion

In conclusion, the concept of Bonus Depreciation, along with Section 179, can provide substantial tax incentives for businesses to invest in new equipment and property. However, businesses must understand the specific laws and guidelines surrounding these provisions, including the changes introduced by the TCJA and the varying state laws. By doing so, businesses can make informed decisions and save a significant amount on their taxes.

David Oesterle PLLC is not rendering legal, accounting, or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances, and current law.