With the Tax Cuts and Job Act (TCJA) of 2017, asset additions can qualify for 100% bonus depreciation in the year they are placed in service. This applies for new and used assets placed in service after September 27, 2017, and before January 1, 2023. Beginning in 2023, bonus depreciation phases out at 20% per year over the next five calendar years until 2027, unless Congress acts to extend it.
See percentage decreases:
- 2023 – the deduction is 80%
- 2024 – the deduction is 60%
- 2025 – the deduction is 40%
- 2026 – the deduction is 20%
- 2027 and future years (unless changed by Congress) – the deduction will be 0%
Bonus Depreciation in a Nutshell
Bonus depreciation has been available in varying amounts for some time. Immediately prior to the passage of the TCJA, for example, taxpayers generally could claim a depreciation deduction for 50% of the purchase price of qualified property in the first year, as opposed to deducting smaller amounts over the useful life of the property under the modified accelerated cost recovery system (MACRS).
At first glance, bonus depreciation can seem like a no-brainer. However, it’s not necessarily advisable in every situation.
For example, taxpayers who claim the qualified business income (QBI) deduction for pass-through businesses could find that bonus depreciation backfires. The amount of your QBI deduction is limited by your taxable income, and bonus depreciation will reduce this income. Like bonus depreciation, the QBI deduction is scheduled to expire in 2026, so you might want to maximize it before then.
The QBI deduction isn’t the only tax break that depends on taxable income. Increasing your depreciation deduction also could affect the value of expiring net operating losses and charitable contribution and credit carryforwards.
And deduction acceleration strategies always should take into account tax bracket expectations going forward. The value of any deduction is higher when you’re subject to higher tax rates. Newer businesses that currently have relatively low incomes might prefer to spread out depreciation, for example. With bonus depreciation, though, you’ll also need to account for the coming declines in the maximum deduction amounts.
Using Cost Segregation to Maximize Your Real Estate Investment
The main benefit of a cost segregation study is to allocate costs that would otherwise be real property with a depreciable life of 39 or 27.5 years to land improvements or personal property with a depreciable life of 15, 7, or 5 years. Land improvements and personal property qualify for bonus depreciation. A cost segregation study enables you to allocate costs to shorter recovery periods, accelerating your depreciation deduction. The 100% bonus depreciation rule of the TCJA was the icing on the cake of a cost segregation study; however, cost segregation studies will continue to be beneficial even if Congress chooses not to extend the 100% bonus depreciation rules.
Changes in the bonus depreciation rules provide unique tax planning opportunities for taxpayers considering a large capital investment in real property. If it is possible to have your property placed in service by December 31, 2022, a cost segregation study will help you qualify for 100% bonus depreciation on some of those costs. The IRS considers an asset to be placed in service when it is “in a condition or state of readiness and availability for a specifically assigned function.” A taxpayer has to examine the intended use of the property and the date at which the property can be used to accomplish those purposes.
A cost segregation study can provide substantial benefits for your business, even beyond 2022. If you plan on purchasing bonus depreciation qualifying property, it may be wise to do so now and place it in service sooner rather than later to maximize your options. CSH can help you chart the most advantageous course of action based on your specific circumstances and the upcoming changes in tax law.
Our CSH cost segregation team blends the expertise of accountants, engineers, building construction professionals, and attorneys to provide a report that accurately documents the components of your property that qualify for this beneficial treatment. Contact us for help establishing an action plan.