Bonus Depreciation Phase Out and What it Means for Your Business
July 12, 2022
At a glance
- The main takeaway: Bonus depreciation, a favorable, bipartisan-supported tax provision, is unlikely to be extended before December 31, 2022. While it’s not recommended to make large investments for the sake of a potential tax break, however, strategic investments should be top of mind for businesses.
- Impact on your business: Despite its popularity, the bonus depreciation allowance enacted in the Tax Cuts and Jobs Act of 2017 will be reduced by 20% year-over-year beginning January 1, 2023, phasing out to zero for tax years beginning after December 31, 2026, unless Congress extends the program.
- Next steps: Determining whether to take bonus depreciation can be complicated. Aprio’s Tax Services team can answer your questions and help you identify opportunities where it applies to your business.
Schedule a consultation with an Aprio Tax professional today
The full story:
Throughout the pandemic, Congress provided companies with much needed COVID relief by extending the bonus depreciation tax provision as a means of providing incentives for businesses to make investments in equipment and improvements to keep people employed and keep factories open and production moving forward.
Given the broad, bipartisan support for the bonus depreciation provision, it would seem like a no-brainer that the business-favorable provision would be extended. Yet, once the Build Back Better Act (BBBA) came to a halt on the Senate floor at the end of 2021, the phase-out of bonus depreciation remained, with reductions in the amounts eligible for deduction scheduled to take affect for purchases made after December 31, 2022.
Under the Tax Cuts and Jobs Act (TCJA), the percentage of bonus depreciation eligible for deduction increased from 50% to 100% on qualified business assets purchased from September 28, 2017 to December 31, 2022. However, the TCJA phases out bonus deduction by reducing the percentage that businesses are allowed to deduct on purchases of qualifying assets by 20% year-over-year, eventually zeroing out on purchases made after December 31, 2026. Under the TCJA provisions, absent any changes, businesses will be allowed to take bonus depreciation deductions in the year of purchase under the following schedule:
- 80% from January 1, 2023 through December 31, 2023
- 60% from January 1, 2024 through December 31, 2024
- 40% from January 1, 2025 through December 31, 2025
- 20% from January 1, 2026 through December 31, 2026
- 0% for purchases made after December 31, 2026
While it is possible that the phaseout may be eliminated in a lame duck session, it now seems unlikely any action will occur prior to the 2022 mid-term elections. Businesses that may need to make large capital investments in the near future should consider whether making those expenditures before December 31, 2022 fits their cash management and tax needs.
The scheduled phaseout of bonus depreciation creates business and tax planning challenges for companies thinking about purchasing depreciable assets.
Making the election into bonus depreciation is not automatic, and may not always be the optimal tax strategy. Depending on the purchase, you may get a better tax result by claiming a Section 179 deduction rather than expensing the purchase under bonus depreciation.
This creates a tax planning challenge for businesses contemplating the purchase of assets eligible for bonus depreciation. Business owners need to decide whether to accelerate planned capital expenditures into 2022 to take full advantage of the bonus provisions or push those expenditures back to a later year when full expensing of the purchase may not be available. It’s best to discuss your options with your trusted tax advisor.
The bottom line
Given the dynamics of this year’s mid-term election, it’s unlikely there will be a last-minute extension of the bonus provisions by the end of the year. So, absent any changes, the phaseout for bonus depreciation will begin on January 1, 2023. While it’s not recommended to make large expenditures solely for the sake of a potential tax break, the timing of necessary strategic expenditures in depreciable assets should be a critical consideration for businesses to benefit from the current favorable tax treatment before December 31, 2022. Bonus depreciation and how it applies to your business can be complicated. Aprio’s Tax Services team can answer your questions and help you identify opportunities and make decisions to achieve the best available business and tax result from this tax provision.
About the Author
Director of Federal Tax Quality Control at Aprio | Tax practice management specialist and conflict resolution and tax research expert
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.