Get Ready to Say Goodbye to 100% Bonus Depreciation

October 26, 2022
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One of the best business tax deductions of all time will end on December 31, 2022. It’s time to say goodbye to 100% bonus depreciation. This is sad news for many business owners, and it makes tax and expense planning for 2023 and beyond a top priority.

The Phasing Out of Bonus Depreciation

Since late 2017, businesses have used bonus depreciation to deduct 100% of the cost of most types of property (other than real property). The bonus depreciation tax deduction will decline 20% per year starting in 2023. Eventually, it will be completely phased out to 0% in 2027.

Let’s say you purchase $100,000 in business equipment and put it into service in 2022. You will be able to deduct the full $100,000 using 100% bonus depreciation for this tax year. If you wait until 2023 to claim the deduction, you will only be able to deduct $80,000 (80%).

Section 179 Expensing

This does not necessarily mean you need to rush out to buy large business assets before 2022 is over. Many businesses still have an alternative tax-saving solution: IRC Section 179 expensing. This is another way business owners can deduct the cost of most types of tangible property, as well as other business expenses like off-the-shelf computer software.

Both Section 179 expensing and bonus depreciation can be used for new and used property. Both can also be used to deduct certain non-structural improvements to non-residential buildings after they are placed into service for your business.

Section 179 vs. Bonus Depreciation

It is important to understand these two tax deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit. Then, you can also claim bonus appreciation for any remaining basis. Starting in 2023, any basis left after applying the Section 179 and bonus depreciation deductions will be deducted with regular depreciation over the span of several years.

There are several key differences between Section 179 vs. bonus depreciation:

  • Section 179 expensing is subject to annual dollar limits that don’t apply to bonus deprecation. These limits are fairly large and won’t affect most small businesses.
  • Section 179 requires more than 50% business use to qualify for the tax deduction. The 50% requirement for bonus depreciation only pertains to vehicles and other specified property.
  • Section 179 is limited to your net taxable business income and cannot result in a loss for the year.
  • The 2022 Section 179 deduction is limited to $27,000 for SUVs. Bonus deprecation does not have this limit.
  • You can use bonus depreciation to deduct land improvements with a 15-year class life, such as sidewalks, driveways, landscaping, fences and swimming pools.

Planning Your Expenses

Depending on what property you need to purchase, you may not need to buy and place it into use by the end of 2022 to take advantage of great tax deductions. However, there are some situations where you may want to take action sooner. An example might be a rental property owner who wants to redo landscaping or make other qualified land improvements. You will get a larger one-year bonus depreciation deduction if the work is done in 2022, rather than waiting until next year when the deduction will only be 80%. Talk with your tax advisor or business consultant to develop the best tax plan for upcoming purchases.

To learn more about the changing bonus depreciation tax laws and how to take advantage of Section 179 expensing as part of your business tax plan, contact Illumination Wealth today.