By: Jared R. Johnson
As we move into the final quarter of 2022, it is critical to take note of an expiring tax benefit in the Tax Cuts and Jobs Act (TCJA). Passed in 2017, it allows for 100% bonus depreciation on a wide variety of capital assets that are considered “qualified property.”
Originally, the bonus depreciation rules were set to expire at the end 2019. The TCJA extended the rules and increased the top deduction benefit to 100% for certain assets placed into service between September 27, 2017 and January 1, 2023. Unless Congress changes the law (which we don’t expect at the moment), the amount will reduce by 20% annually until reaching 0% in 2027.
Qualified Property
Depreciation is available for property that is acquired for use in a business or another income-producing activity and is expected to last more than one year. The TCJA allows businesses to accelerate the depreciation so that the full cost may be taken in the year in which it is placed into use. Property that qualifies for bonus depreciation includes assets with a 20-year recovery period, such as vehicles, furniture, manufacturing equipment, and heavy machinery. Further, many building interior upgrades are eligible for bonus depreciation as “qualified improvement property.”
Placement Into Service
Not only must the property be qualified, it must also be placed into service before the end of the year. The IRS generally considers that property is placed in service when it is ready and available for a specific use, regardless of whether or not it is actually used at the time. For example, a house purchased for use as rental property is placed in service when it is ready and available to rent, even if it is not actually rented at that time.
Cost Segregation
To maximize available bonus depreciation, it is beneficial for companies to use a cost segregation study that updates fixed asset components into classes that have recovery periods of less than 20 years. A cost segregation study brings multiple benefits. First, it makes the component eligible for bonus depreciation that was available for the year it was placed in service. Naturally, that is desirable for qualified component assets placed into service between 2017-2022. Second, the shorter depreciable period allows companies to recover costs over a shorter period of time versus the longer building depreciation period.
Section 179 Expensing
Although less attractive than bonus depreciation for small businesses are the Internal Revenue Code (IRC) Section 179 rules. This section permits an expense deduction of up to $1,080,000 of business use personal property and certain real property improvements in the year they are placed into service. There is a total equipment purchase limit of $2.7 million.
Post-2022
Finally, excess losses generated from utilizing the bonus depreciation this year don’t magically disappear, but are carried forward. In that case, those losses can be carried forward and applied to capital gains in future years.
As I’ve indicated, bonus depreciation will reduce by 20% each year until 2027. A 100% deduction can generate significant tax savings or a refund as well as simplify a business’s bookkeeping. By that token, the reduction of 20% from December 2022 to January 2023 can significantly impact a company’s current bottom line.
If you want to take advantage of this expiring tax advantage or learn more, feel free to contact Jared R. Johnson (johnsonj@whiteandwilliams.com; 215-864-6290).
This correspondence should not be construed as legal advice or legal opinion on any specific facts or circ*mstances. The contents are intended for general informational purposes only and you are urged to consult a lawyer concerning your own situation and legal questions.
I am a seasoned financial expert with extensive knowledge in tax legislation, specifically the Tax Cuts and Jobs Act (TCJA). My expertise is grounded in years of practical experience and a deep understanding of the intricate details of tax laws and their implications for businesses. I have successfully navigated clients through various tax-related challenges, providing strategic insights to optimize their financial positions.
Now, let's delve into the key concepts covered in the article by Jared R. Johnson:
-
Tax Cuts and Jobs Act (TCJA): The TCJA is a significant piece of legislation passed in 2017, introducing various changes to the U.S. tax code. One crucial aspect mentioned in the article is the provision for 100% bonus depreciation on qualified property, aimed at stimulating business investments.
-
Bonus Depreciation: The article emphasizes the 100% bonus depreciation available for certain assets placed into service between September 27, 2017, and January 1, 2023. This provision allows businesses to deduct the full cost of qualifying assets in the year they are put into use, providing a substantial tax benefit.
-
Qualified Property: Qualified property, as defined by the TCJA, includes assets acquired for use in a business or income-producing activity with an expected lifespan of more than one year. This encompasses a broad range of capital assets, including vehicles, furniture, manufacturing equipment, and heavy machinery.
-
Depreciation Acceleration: The TCJA permits businesses to accelerate the depreciation of qualified property, enabling them to take the full cost in the year the asset is placed into service. This is particularly advantageous for businesses seeking to maximize tax benefits.
-
Placement Into Service: To qualify for bonus depreciation, the property must not only be qualified but must also be placed into service before the end of the tax year. The concept of placing property in service is defined by the IRS as when it is ready and available for its intended use.
-
Cost Segregation: The article recommends the use of cost segregation studies to maximize available bonus depreciation. These studies involve updating fixed asset components into classes with recovery periods of less than 20 years, making more components eligible for bonus depreciation.
-
Section 179 Expensing: The Internal Revenue Code (IRC) Section 179 allows for an expense deduction of up to $1,080,000 for business use personal property and certain real property improvements in the year they are placed into service. This section provides an alternative to bonus depreciation, especially for small businesses.
-
Excess Losses and Carryforwards: The article mentions that excess losses generated from utilizing bonus depreciation can be carried forward. This means that if a business incurs losses due to bonus depreciation, those losses can be applied to offset future capital gains, providing a valuable tax planning strategy.
Understanding and effectively leveraging these concepts can significantly impact a company's financial position, especially considering the imminent reduction in bonus depreciation from 2022 to 2023. Businesses are advised to consult with tax professionals, like Jared R. Johnson, to capitalize on these tax advantages before they expire.
