If you want to qualify for the full benefits of the Tax Cuts and Jobs Act, time is running out. The provision that allows for 100% bonus depreciation on a wide variety of assets that are considered “qualified property” will decrease by 20 points each year over the next few years until it eventually phases out completely.
This TCJA extended the bonus depreciation rule was set to expire at the end of 2019 and increased the deductible amount to 100% for assets placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Unless the legislation is adjusted, the bonus percentage will decline by 20 points each year for the following several years until it fades away.
What is Bonus Depreciation?
Bonus depreciation is an additional first-year depreciation deduction for qualified property, which generally includes new tangible property with a recovery period of 20 years or less. This bonus depreciation deduction is in addition to any other allowable depreciation deductions.
Bonus Depreciation Effects on Taxable Income
Under the bonus depreciation rules, a taxpayer can reduce their taxable income in the current year by the cost of certain depreciable assets. Bonus depreciation permits a taxpayer to immediately deduct 100% of depreciation on their federal tax return. Without this rule, taxable income will increase for many businesses, in the short term, as this will no longer be an option.
Retailers and other business types that have invested in new equipment and fixtures will be especially affected by the impending phase-out of bonus depreciation. If you are one of these business owners, it is important to understand how the changes may affect you and take steps that will help you not hinder.
Bonus Depreciation Deductions Benefits Likely to be Reduced After 2022
The Tax Cuts and Jobs Act, which was signed into law in late 2018, increases first-year bonus depreciation to 100 percent. For assets put into service after September 27, 2017, the new regulations apply to all long-term assets. From September 27, 2017 until January 1, 2023, you can claim a 100% bonus depreciation on qualifying assets. The amount of first-year bonus depreciation decreases as follows after that:
- 80% for property placed in service after December 31, 2022 and before January 1, 2024.
- 60% for property placed in service after December 31, 2023 and before January 1, 2025.
- 40% for property placed in service after December 31, 2024 and before January 1, 2026.
- 20% for property placed in service after December 31, 2025 and before January 1, 2027.
You do not have to claim bonus depreciation if you do not want to. However, if you wish to get the most out of your deductions, you should take advantage of this choice whenever feasible. Bonus depreciation may also be used to increase the amount of first-year depreciation available for business vehicles by $8,000.
You Can Only Take Advantage of Bonus Depreciation for a Property if:
- It has a predicted useful existence of less than 20 years (this refers to all sorts of tangible personal business property and software you acquire, but not real estate).
- You buy the property from an unrelated person (i.e., not a family member or someone you received it from as a gift).
- Has been used more than 50% of the time for business purposes such as automobiles.
Under prior law, you could only use bonus depreciation for new property. The Tax Cuts and Jobs Act has changed that rule, and now you can use bonus depreciation for purchases of new or used property starting in 2018.
Jose A. Ramirez is an experienced and sought-after tax strategist who helps investors through the process of bonus depreciation. He specializes in Short-Term Rentals such as AirBNB and VRBO, Landlords, Wholesalers, Rehabbers, Flippers, Real Estate Brokers, and Realtors. Schedule an appointment with Jose A. Ramirez for any additional questions you may have about this recent event. Make sure you are subscribed to the Advanced Tax Advisors email list so you can receive current events just like this in the future.