What is bonus depreciation? It’s the opportunity to take accelerated depreciation and write off your asset purchase quicker than is usually allowed. And what’s with the bonus depreciation phase out 2023?
You usually can’t write off the entire purchase cost in the first year when you purchase assets. Sometimes you can use Section 179 to expense the purchase when you acquire it. But Section 179 can complicate matters when you sell the asset. However, in recent years, the IRS has allowed bonus depreciation on certain assets.
What is Bonus Depreciation?
Bonus Depreciation is an accounting method that allows businesses to write off a percentage of the cost of certain assets in the year the property is in service.
The purpose of Bonus Depreciation is to encourage businesses to invest in new equipment and machinery. It provides businesses a tax incentive to do so. Though the rules can change yearly, bonus depreciation is currently available for both new and used equipment. The amount you can write off depends on the type of asset.
For example, bonus depreciation on other assets such as buildings and machinery has no cap. In prior years, bonus depreciation was limited to 50% of the purchase price of an asset and has sometimes been limited to only new assets. Currently, many assets are eligible for 100% bonus depreciation.
The tax savings from the deduction will depend on the taxpayer’s income tax bracket and individual financial circumstances. However, the savings can be significant.
Bonus Depreciation Qualifications
In order to take advantage of bonus depreciation, businesses must meet certain requirements.
Firstly, the asset must be placed in service by the business. So if you order new equipment this year, but the asset is not in service until next year, you would not be eligible for bonus depreciation this year. However, you would be eligible to take bonus depreciation next year when the asset is in service.
Currently, you can only use bonus depreciation on assets that typically use MACRS depreciation schedules with less than 20-year schedules. This includes all machinery, equipment, land improvements, and furniture. It excludes residential and commercial property.
The asset must also be new to the taxpayer. So if you personally own a vehicle and decide to start using it for business purposes, the car would not qualify for bonus depreciation since you already own the asset.
Note that the asset does not have to be new. For example, if you purchase a piece of used furniture in your office, the asset would be new to you and qualify for bonus depreciation.
Bonus Depreciation in 2023
The IRS sets the amount of Bonus Depreciation you can take in any given year, which is subject to change. In addition, the IRS has enacted several retroactive bonus depreciation changes in recent years.
For example, in 2020, the maximum amount of Bonus Depreciation you could take was 100%. However, this amount decreases over time, with the maximum amount falling to 80% in 2023.
As a result, businesses will need to plan for a decrease in their Bonus Depreciation deduction in 2023.
Bonus Depreciation Phase Out 2023 Schedule
Bonus depreciation helps encourage businesses to invest in new equipment and property. In addition, it gives them a tax break on the purchase price.
The Tax Cuts and Jobs Act, enacted in 2018, increased first-year bonus depreciation to 100%, which has remained through the end of 2022.
The deduction phases out over the following four years, dropping to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
After 2026, the deduction will no longer be available.
The bonus depreciation phase-out schedule gives businesses a powerful incentive to invest in new equipment and property. By offering a 100% deduction on the cost of qualifying purchases, the schedule encourages businesses to make investments that they might otherwise delay or forego altogether. As a result, the bonus depreciation phase-out schedule is vital in promoting economic growth and job creation.
How Can I Use Bonus Depreciation Before It Ends?
As a small business owner, you’re always looking for ways to save on taxes, and purchasing fixed assets allows you to take advantage of bonus depreciation.
So if you’re considering taking advantage of this tax break, now is the time to do it. You can learn more about bonus depreciation and how to take advantage of it by speaking with your accountant or financial advisor.
Make Large Purchases Before Year End
The simplest way to use bonus depreciation is by making large purchases before the end of the year. This allows you to place your new equipment in services, making it eligible for bonus depreciation this year.
Claim Bonus Depreciation on Your Tax Return
When creating your depreciation schedule for the current year, you need to ensure that you label the assets as being eligible for bonus depreciation. This means that the assets have less than 20-year lifespans, are indicated as new to you, and are not electing Section 179.
Consider Accelerating Asset Purchase Timelines
Even if you do not have your assets in service during the current year, you should consider moving your purchase timeline forward. Because bonus depreciation phases out over the next 5-years, you could see substantial tax savings by moving planned future purchases forward 1-2 years.
Bonus Depreciation Phase Out 2023 FAQs
Will this phase-out affect new properties only?
No. The phase-out schedule applies to both new and used property used during business.
Will the same qualifications be in place during the phase-out?
Based on the current rules (which are subject to change), the same qualifications for assets will apply throughout the phase-out period.
Is the Bonus Depreciation Phase Out 2023 permanent?
Under current rules, the phase-out is permanent. However, future legislation could allow bonus depreciation again.
Why is it being phased out?
Bonus depreciation was enacted to spur investment by small businesses. However, when the government implemented the rules, the idea was that only a short-term incentive was needed to achieve the desired results.
Is there an alternative?
Yes. Section 179 allows small businesses to expense the purchase price of assets in the first year the asset is in service. Furthermore, section 179 has additional flexibility since you can decide how much Section 179 expenses you want to take in the first year.
Final Thoughts on the Bonus Depreciation Phase Out
Current bonus depreciation rules are an opportunity for small businesses and small business owners to achieve substantial tax savings. In addition, the increased deductions will result in dollar-for-dollar reductions in taxable income for pass-through entity owners.
To take full advantage of the current bonus depreciation rules, business owners should purchase assets as soon as possible over the next few years.
Knowing the ins and outs of the bonus depreciation phase out 2023 is just one thing a tax professional can help you understand. Our tax professionals are knowledgeable with everything from bonus depreciation to capital gains rollovers, and more. Contact Shared Economy Tax’s tax experts now to answer your tax questions.