Under current law, businesses may take 100% bonus depreciation on qualified property both acquired and placed in service after September 27, 2017 and before January 1, 2023. The bonus depreciation rules have allowed businesses to fully expense qualified fixed assets resulting in reduced taxes. However, it’s important to note that this tax incentive is coming to an end and businesses should plan now if they want to take full advantage of this tax benefit. Beginning January 1, 2023, full bonus depreciation will decrease 20% each year until it phases out as shown in the chart below.
|Placed in service year||Bonus depreciation percentage for qualified property||Bonus depreciation percentage for longer production property and certain aircraft|
|Sept. 28, 2017 – Dec. 31, 2022||100%||100%|
This article addresses the considerations and planning opportunities related to bonus depreciation.
Qualified Property + Qualified Improvement Property
Qualified property eligible for bonus depreciation is tangible property with a recovery period of 20 years or less. Examples of qualified property include software and computer equipment, vehicles, manufacturing equipment, heavy machinery and furniture, among others. Both new and used property are eligible for bonus depreciation.
Qualified improvement property is also eligible for bonus depreciation. This generally includes improvements made by the taxpayer to the interior of a nonresidential building after it is placed in service. Property is “placed in service” when the asset is ready and available for use in its intended form.
Examples of qualifying improvements include installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing. Excluded from the definition are improvements to internal structural framework, enlargements to the building, and elevators or escalators.
The time-sensitive consideration in planning to take advantage of the 100% bonus depreciation rules is that the property must be placed in service on or before December 31, 2022. Assets placed in service after this date will be subject to the reduced bonus deduction.
Cost segregation studies can be used to increase the value of bonus depreciation. These studies categorize components of buildings into certain assets with recovery periods of 20 years or less. In turn, this makes the qualifying components of buildings eligible for 100% bonus depreciation if placed in service by December 31, 2022.
The bonus depreciation rules can result in significant federal tax savings. Unfortunately, many states do not follow these rules and require depreciation deductions to be taken over a longer period of time in determining state tax liability.
Once bonus depreciation is fully phased out, some small businesses may be able to continue expensing fixed asset purchases under the Section 179 expensing rules. However, there are significantly more limitations associated with Section 179 expense versus bonus deprecation.
Time is of the essence for businesses wanting to take advantage of 100% bonus depreciation before it expires on January 1, 2023. Planning to maximize depreciation can be complex and requires expert advice. Please contact Smith + Howard’s tax team as you navigate the tax considerations and planning opportunities for bonus depreciation.
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