The Tax Cuts and Jobs Act liberalized the rules for depreciating business assets. However, the amounts change every year due to inflation adjustments. And due to high inflation, the adjustments for 2023 were big. Here are the numbers that small business owners need to know.
For qualifying assets placed in service in tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million. But if your business puts in service more than $2.89 million of qualified assets, the maximum Sec. 179 deduction begins to be phased out.
Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software.
Businesses can also claim Section 179 deductions for qualifying real estate improvement property (QIP), up to the maximum allowance of $1.16 million. What exactly is QIP? It is an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or the internal structural framework of a building don’t count as QIP. These factors usually need to depreciate over 39 years. There’s no separate Section 179 limit for the QIP deduction, so deductions reduce your maximum allowance dollar for dollar.
For nonresidential real property, Sec. 179 deductions are also allowed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Finally, eligible assets include depreciable personal property used predominantly in connection with furnishing lodging, such as furniture and appliances in a property rented to transients.
There’s a special limitation on heavy SUV tax deduction under Section 179. This means those with gross vehicle weight ratings (GVWR) between 6,001 and 14,000 pounds. For tax years beginning in 2023, the maximum Sec. 179 deduction for heavy SUVs is $28,900.
For qualified new and used assets that were placed in service in calendar year 2022, 100% first-year bonus depreciation percentage could be claimed.
However, for qualified assets placed in service in 2023, the first-year bonus depreciation percentage dropped to 80%. In 2024, it will drop to 60% (40% in 2025, 20% in 2026 and 0% in 2027 and beyond).
Eligible assets include depreciable personal property such as equipment, computer hardware and peripherals, vehicles and commercially available software. You can also claim first-year bonus depreciation for real estate QIP.
For certain assets with longer production periods, there is a delay to these percentage cutbacks by one year. For example, the 80% depreciation rate will apply to long-production-period property placed in service in 2024.
For federal income tax depreciation purposes, passenger autos are defined as cars, light trucks and light vans. These vehicles are subject to special depreciation limits under the so-called luxury auto depreciation rules. For new and used passenger autos placed in service in 2023, the maximum luxury auto deductions are as follows:
These allowances assume 100% business use. There will be further adjustments for inflation in future years.
Heavy SUVs, pickups, and vans (those with GVWRs above 6,000 pounds) are exempt from the luxury auto depreciation limitations. This is because they’re considered transportation equipment. As such, heavy vehicles are eligible for Sec. 179 deductions (subject to the special deduction limit explained earlier) and first-year bonus depreciation.
Here’s the catch: You must use heavy vehicles over 50% for business purposes. Otherwise, the business-use percentage of the vehicle’s cost must depreciate using the straight-line method. Additionally, it’ll take six tax years to fully depreciate the cost.
Consult with us for the maximum depreciation tax savings in your situation.