Congress enacted the Tax Cuts and Jobs Act (“TCJA”) in 2018, which created a five-year window for taxpayers to take 100% in first-year bonus depreciation on qualifying property. The Act allows you to deduct 100% in bonus depreciation for any long-term asset placed in service after September 27, 2017. But while the five-year window is about to close on January 1, 2023, there is still time to take advantage of bonus depreciation. Talk to a tax professional today to learn more about this valuable cost-saving tool.
What Is Bonus Depreciation?
Bonus depreciation allows a business taxpayer to deduct a certain percentage of the cost of an asset in the first year that the business places the asset in service. It allows businesses to deduct depreciation sooner and in a higher amount. Using bonus depreciation, you can deduct some defined portion of the cost of an asset in the first year it was purchased. The remaining cost can be deducted in the future using regular depreciation or Section 179 expensing.
Under prior law, bonus depreciation was 50% for tax years 2015 through 2017. It then dropped to 40% in 2018 and 30% in 2019. No bonus depreciation would be available in 2020 and later years. While this has changed because of the TCJA, the bonus depreciation percentage for eligible property that is acquired before September 28, 2017, and placed in service before January 1, 2018, remains at 50 percent.
To What Property Does Bonus Depreciation Apply?
Before the change in 2018, you could only apply bonus depreciation to new assets. Now, you can apply bonus depreciation to purchases of new or used property.
Property qualifies for bonus depreciation if it has a useful life of 20 years or less and is purchased from an unrelated party. Bonus depreciation may not be applied to property received by gift or inheritance.
The definition of property that qualifies for 100 percent bonus depreciation now includes used property acquired and placed in service after September 27, 2017, if all the following apply:
- The taxpayer or predecessor business did not use the property at any time before acquiring it.
- The taxpayer did not acquire the property from a related party.
- The taxpayer did not acquire the property from a component member of a controlled group of corporations.
- The taxpayer’s basis of the used property is not calculated in whole or in part by reference to the adjusted basis of the property held by the seller or transferor.
- The taxpayer’s basis of the used property is not calculated under the provision for deciding the basis of property acquired from a decedent.
- The cost of the used property eligible for bonus depreciation does not include the basis of property determined by reference to the basis of other property held at any time by the taxpayer such as with a like-kind exchange or involuntary conversion.
Additionally, any asset that is listed property must be used more than 50% of the time for business purposes to qualify for bonus depreciation. Examples of listed property include automobiles and certain other personal property.
The Window Closes at the End of 2022
However, the TCJA changed this schedule. It increased bonus depreciation to 100% – effective on September 27, 2017. However, time is of the essence since it only remains in effect until January 1, 2023.
How Does Bonus Depreciation Change In 2023?
As of January 1, 2023, first-year bonus depreciation for assets placed in service is as follows:
- 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.
Bonus Depreciation and Motor Vehicles
Changes to bonus depreciation under the TCJA also affected depreciation limits for passenger vehicles placed in service after December 31, 2017. Note the following comparison: If you do not use bonus depreciation, the greatest allowable depreciation deduction is:
- $10,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
On the other hand, if you claim 100 percent bonus depreciation on a qualifying motor vehicle or truck, the maximum allowable depreciation deduction is:
- $18,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
Talk to a Qualified Tax Professional
Issues related to bonus depreciation such as when an asset is placed in service and what asset qualifies for bonus depreciation may be confusing and complicated. However, since time remains to take advantage of the many benefits of bonus depreciation, it makes sense to talk to a qualified tax professional and learn more.
If you live in New York or the Tri-State area and have any questions about any tax-related issue, including bonus deprecation, call 212-490-0704 today for a FREE consultation. You can also learn more online here – THE TAX EXPERTS.
