Since 2018, taxpayers have been able to take advantage of favorable bonus depreciation rules found in the Tax Cuts and Jobs Act. However, these rules will begin to phase out over the next several years. Read on to find out how this could affect you.
Bonus Depreciation
The passing of the TCJA allowed most taxpayers to claim 100% bonus depreciation for the cost of qualifying business property. This included tangible property with a recovery period of 20 years or less and depreciated under MACRS rules. It also included most computer software, water utility property, and qualified artistic productions.
However, the anticipated phase-out of bonus depreciation became effective on January 1, 2023. For assets placed in service starting on this date, the deduction for the first-year will be reduced to 80% of the asset’s adjusted basis. Under current law, bonus depreciation will continue to drop an additional 20% annually through 2027.
The deduction phase-out is scheduled as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
These changes present tax-planning opportunities to consider as companies project out their taxable income. It’s also important to note that it’s possible to elect out, if so desired.
Section 179 Depreciation
In lieu of bonus depreciation, taxpayers may also be able to expense the cost of certain fixed asset purchases under Code Section 179. Eligible property includes tangible 1245 property depreciated under MACRS, off-the-shelf computer software, qualified improvements, roofs, HVACs, fire protection systems, and security systems. The acquired eligible property may be new or used. Taxpayers can elect to utilize Section 179 when the return is filed or on an amended return in the year of election.
The limits for 2023 and 2024 are as follows:
| 2023 | 2024 | |
| Section 179 Limit | $1,160,000 | $1,220,000 |
| Phase-out Limit* | $2,890,000 | $3,050,000 |
*Once this threshold is hit, a dollar-for-dollar phase out begins.
Questions?
If you have any questions regarding bonus depreciation or section 179 limits, call us at 401-921-2000 or fill out our contact form to get started.