Under current law, 100% bonus depreciation will be phased out in steps for property placed in service in calendar years 2023 through 2027. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and a 0% rate will apply in 2027 and later years.
For certain aircraft (generally, company planes) and for the pre-January 1, 2027 costs of certain property with a long production period, the phaseout is scheduled to take place a year later, from 2024 to 2028.
Of course, Congress could pass legislation to extend or revise the above bonus depreciation phase out plan.
In the past, used property didn’t qualify. It currently qualifies unless:
Taxpayers can elect to reject bonus depreciation for one or more classes of property. The election out may be useful for sole proprietorships, and business entities taxed under the rules for partnerships and S corporations, that want to prevent “wasting” depreciation deductions by applying them against lower-bracket income in the year property was placed in service — instead of against anticipated higher bracket income in later years.
Note that the taxing of business entities taxed as “regular” corporations (in other words, non-S corporations) are at a flat rate.
Before the 2017 Tax Cuts and Jobs Act (TCJA), bonus depreciation was available for two types of real property:
The TCJA inadvertently eliminated bonus depreciation for qualified improvement property.
However, the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES Act) made a retroactive technical correction to the TCJA. The correction makes qualified improvement property placed in service after December 31, 2017, eligible for bonus depreciation.
If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that — subject to dollar limits — allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and some building improvements. Section 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Section 179 expensing is useful.
The above discussion touches only on some major aspects of the bonus depreciation rules to keep in mind. This is a complex area with tax implications for transactions other than simple asset acquisitions. Contact us if you have any questions about the bonus depreciation phase out or how to proceed in your situation.