With the passage of the Tax Cuts and Jobs Acts (TCJA) in 2017, major changes were made in regard to bonus depreciation. The law change increased the deduction from 50% to a 100% deduction of the purchase price of eligible assets in the year of acquisition. This was a major change of the law, as it has given businesses significant tax-saving opportunities in the years when new property has been purchased.
This 100% year-one right-off has been available for all eligible assets placed in service after September 27, 2017 with depreciable lives under 20 years. There is no annual limitation on the total dollar amount of bonus depreciation that could be deducted in a single year.
Starting January 1, 2023, this deduction begins to change. The bonus depreciation deduction available begins to phase down, decreasing by 20% each year from 2023 through 2027. Therefore, effective now in 2023, any eligible assets purchased and placed into service in 2023 are only allowed a bonus depreciation deduction of 80% of the total purchase price, with the remaining 20% to be depreciation over several years based on the asset’s depreciable life.
To illustrate how this phase-down affects the deduction, the table below demonstrates how the bonus depreciation would change for a $100,000 piece of equipment (used 100% for business purposes) depending on what year the equipment was acquired and placed in service.
Year Property purchased & equipment began being used by the business | Bonus depreciation percentage available | Deduction available in first year of purchase | Remaining cost of asset to be depreciated over several years | Tax savings in year one (assuming a flat 22% tax rate) |
2022 | 100% | $100,000 | $0 | $22,000 |
2023 | 80% | $80,000 | $20,000 | $17,600 |
2024 | 60% | $60,000 | $40,000 | $13,200 |
2025 | 40% | $40,000 | $60,000 | $8,800 |
The 100% bonus depreciation has been an important deduction in helping create tax savings opportunities the past several years and the phase-down going forward will undoubtedly have an effect for many businesses going forward.
If you have any questions regarding the bonus depreciation phase-down or how it might affect your taxes going forward, please give our staff a call at 307-577-4040.
In other news: Our staff is busy working on finishing up extended returns from 2022, and we appreciate everyone’s help this year as we introduced the March 1st deadline. Starting Friday, June 9th, our office will be closed on Fridays to allow our staff some additional time off to enjoy the summer after another busy tax season. We will be open regular hours (8-5) Monday through Thursday. We hope everyone has a great summer!