Bonus Depreciation: Big Changes Coming

by | Oct 3, 2022

Bonus Depreciation: Big Changes Coming

by | Oct 3, 2022

All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 percent bonus depreciation.

If you’re like most small business owners, you want to maximize your tax deductions prior to the end of the year. Keep reading to understand how to do this before the end of the year.

Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property.

For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. If you wait until 2023, you’ll only be able to deduct $80,000 (80 percent).

Does this mean you should rush out and purchase business property before 2022 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing.

IRC Section 179 expensing and bonus depreciation both allow business owners to deduct in one year the cost of most types of tangible personal property, plus off-the-shelf computer software.

You can use both for new and used property acquired through a purchase from an unrelated party. You can also use both to deduct various non-structural improvements to non-residential buildings after placing them in service. Moreover, the two deductions aren’t mutually exclusive.

You may utilize Section 179 expensing for eligible property up to the annual limit and subsequently apply bonus depreciation to any remaining basis.

From 2023 onward, when bonus depreciation drops below 100%, businesses will allocate the remaining basis by applying Section 179 and regular depreciation over multiple years.

But there are some significant differences between the two deductions:

Section 179 deduction has yearly dollar limits, but these usually don’t affect most small businesses.

To claim this deduction, business use must exceed 50%, except for specific vehicles. It’s limited to taxable business income, excluding Section 179.In 2022, SUVs have a $27,000 limit for the Section 179 deduction, but bonus depreciation has no such limit. Bonus depreciation applies to land improvements with a 15-year class life, such as sidewalks, fences, driveways, landscaping, and swimming pools.

Usually, there’s no urgent requirement to buy and put the property into use by the end of 2022 to benefit from 100% bonus depreciation. However, there might be some cases where this doesn’t apply.

If you have a rental property and want to do major landscaping or land improvements, you can deduct more of the expenses in one year in 2022 (100%) than in 2023 (80%).

If you would like to discuss bonus depreciation or Section 179 expensing, schedule an appointment by clicking here or calling 713-955-2900!

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