100% bonus depreciation is scheduled to expire at the end of 2022 and will decrease over time until it’s phased out by 2027. The current law, passed under the Tax Cuts and Jobs Act of 2017 and finalized in 2020, gives business owners the option to deduct a larger percentage of qualified assets from their taxes in the first year of use, rather than spread out over the lifetime of the asset. This affords them a larger upfront deduction, which can be used for capital investments. Unlike other programs, bonus depreciation is not limited to a dollar amount.
Qualifications
Business owners may elect to expense qualified business property in the year the property is first placed in service. Qualified property generally includes depreciable business assets with a recovery time of 20 years or less, including machinery, equipment, vehicles, computers and furniture. It does not include land or buildings. The qualified property can be new or used and must be in-use the year in which you deduct it from your taxes.
Accelerating Capital Improvements
If you plan to take full advantage of the higher bonus depreciation, you should consider accelerating your capital improvement plans before the program is set to expire. Bonus depreciation will be reduced to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and will be completely phased out by 2027, barring a Congressional decision to extend the program. After bonus depreciation expires, businesses can claim yearly depreciation deductions based on the property’s useful life.
Section 179 Alternative
As many states do not conform to bonus depreciation, small business owners may be able to claim IRC Section 179 benefits in its place. Like bonus depreciation, the program allows business owners to deduct 100% of qualified property up-front. Aside from wide-spread availability, the program differs from bonus depreciation in a few key ways:
- Section 179 allows for more flexibility with timing. For example, you can split the deduction by claiming half in the first year while dispersing the remaining deduction throughout the lifetime of the asset. This is not possible through the bonus depreciation program.
- You may claim Section 179 for real estate updates, such as installing a new roof, which is not allowed through bonus depreciation.
- You can only deduct up to $1,080,000 for 2022 with Section 179. There is no maximum deduction with the bonus depreciation program.
Key Takeaway
If you choose to take advantage of the bonus depreciation program, you should plan and invest in your capital and business improvement projects before the end of the year. After the program expires, you will still be able to deduct these expenses through straight-line depreciation. If bonus depreciation is not available in your state, consider utilizing IRC Section 179. For more information about bonus depreciation, see the IRS FAQ page on the topic. If you have questions about what qualifies for bonus depreciation, whether you should claim Section 179 in its place, and how to optimize either program’s advantages, contact a member of the Janover team today.