Nels Larsen, CPA, CMA, CFM
Bonus Depreciation is Phasing Out!
Updated: Aug 12, 2022
Just a short article to remind readers that while it seems like we have had 100% bonus depreciation for a while, this year (2022) is the last year we have the ability to take 100% bonus depreciation. Once the clock strikes midnight on 12/31/2022 bonus depreciation will start to phase out.
Before getting too much into the nitty gritty of what this means, think about any significant purchases you may need to make for your business. A new vehicle? New equipment or machinery for your company? Or, if you are a real estate investor who likes to utilize depreciation deductions and cost segregation studies, this bonus depreciation phase out is something to consider. Should you purchase that eligible asset before the end of the year?
As usual, the answer is, "it depends". Depends on your projected tax liability for 2022, your cashflow, and of course what macroeconomic trends are doing to your business. If we continue to see increased interest rates in an attempt to tamp down inflation, maybe that makes the cost of financing an otherwise qualified equipment purchase not make good financial sense. As I like to say, we don't want to let the tax tail wage the economic dog!
Starting with 2023 bonus depreciation will drop from 100% to 80%, and will reduce by 20% each year until 2026. When we get to 2027 bonus depreciation as we know it will be gone. That is, unless we have new tax legislation that brings it back. As I write this we are experiencing annualized inflation in the high single digits (7%-9% when annualized), and the Federal Reserve has just implemented 2 interest rate hikes of 75 basis points each in the last 3 months.
As a reminder, qualified property is defined as tangible property with a recovery period of 20 years or less. The law eliminated the requirement that the original use
of the qualified property begin with the taxpayer, as long as the taxpayer had not previously used the acquired property and the property was not acquired from a related party. The inclusion of used property has been a significant, and favorable, change from previous bonus depreciation rules.
Subsequent modifications to the original law clarified bonus depreciation rules for qualified improvement property (QIP). The CARES Act permanently codified that QIP has a 15-year recovery period as well as the 20-year alternative depreciation system (ADS) recovery period. As a 15-year asset, QIP is eligible for 100% bonus depreciation through 2022 and the sunsetting bonus depreciation percentages through 2026.
If you care to discuss what the phase out of bonus depreciation will do to your business, please email Nels@GuidanceAccounting.com or call 612-618-5299.