Since its inception in the Job Creation and Worker Assistance Act of 2002, Bonus Depreciation (“Bonus”) has proven to be a compelling tax-savings option for companies looking to accelerate their depreciation deductions.  Starting in 2023, however, Bonus is sun setting, potentially creating a major shift in how companies may handle their depreciation and business investment.

Bonus was conceived in 2002 to encourage companies to invest more in their businesses.  Instead of forcing companies to depreciate an asset over its useful life, Bonus accelerated that deduction and allowed for companies — at the time — to immediately deduct 30% of the value of the asset as depreciation in its first year of use.

Over the past 20 years, the amount of allowable Bonus has varied, ranging from 30% to 100%.  

When the U.S. Government passed the Tax Cuts and Jobs Act of 2017, however, Bonus came into increased focus.  While the bill extended Bonus through 2026, it allowed for a 100% deduction to be taken between 2018 and 2022.  Starting in 2023, Bonus is set to be reduced by 20% each year until it is finally phased out after 2026.

Here’s a simple guide:

• If the asset was placed into service in 2022, federal law permits a 100% Bonus rate.

• If the asset was placed into service in 2023, federal law permits an 80% Bonus rate.

• If the asset was placed into service in 2024, federal law permits a 60% Bonus rate.

• If the asset was placed into service in 2025, federal law permits a 40% Bonus rate.

• If the asset was placed into service in 2026, federal law permits a 20% Bonus rate.

• If the asset was placed into service in 2027, federal law permits a 0% Bonus rate.

The shift, of course, creates a major change for companies that have been accustomed to the 100% Bonus over the last several years.  But with a gradual reduction in Bonus rates, it may still be advantageous for taxpayers to consider using it as a tax strategy.  Below are some elements to keep in mind as you work with a Perlson professional on your Bonus strategy.

Qualifying Assets for Bonus Depreciation

Bonus is only available on qualifying assets that meet strict requirements.  In addition to rules that require the asset to have no more than 20 years of useful life, the Tax Cuts and Jobs Act of 2017 added a host of other stipulations, including:

• The asset must not have been used by the taxpayer prior to acquisition.

• The asset must not have been acquired in a tax-free exchange.

• The asset must not have been acquired from a related party.

• The asset must not have been acquired by gift or inheritance.

It’s best to review your unique circumstances with a Perlson professional to determine if your acquired assets qualify under Bonus rules.

What about Vehicles?

The entire cost of a vehicle can be depreciated under Bonus rules if the vehicle’s weight is over 6,000 lbs. Vehicles 6,000 lbs. or less are subject to special depreciation limitations.  

The limitations for vehicles placed in service in 2023 are:

First year: $20,200

Second Year: $19,500

Third Year: $11,700

Years thereafter: $6,960

What Are the Useful Life Requirements?

Bonus rules make clear that only assets with 20 years or less of useful life can be depreciated.

Election-Out Requirements

Taxpayers are allowed to opt out of Bonus if they determine that their unique circumstances would benefit from a different depreciation strategy.  In order to do so, taxpayers must make the election on a timely filed tax return (including extensions).  

• The election-out is made on an annual basis.

• The election-out is made for a specific class of assets based on their useful life.   For example, the election out is made for all 5 year assets placed in service in that particular year.

State Taxes

Most states don’t accept Bonus.   Among them are NY, NJ, CT, and CA.

Tax Planning

Unlike regular depreciation which apportions the deduction based on when the asset is placed in service, Bonus has no such limitation.   Therefore assets placed in service on December 31 will receive 100% of the Bonus allowable for the year.

If you are contemplating purchases of fixed assets, PLAN NOW to have those assets placed in service by December31.  In addition, assets placed in service in 2024 are only eligible for a 60% deduction, not an 80% reduction.

Concluding Thoughts

For years, Bonus has been a significant tax planning strategy for taxpayers seeking accelerated depreciation to reduce their tax liability.  While Bonus is in the process of sun setting, it still offers significant tax deductions for the next few years.  There are also other depreciation strategies available.  For example, Section 179 depreciation (“179”), in certain circumstances, will yield the same if not more tax savings than Bonus.  In addition, Bonus and 179 can be used in tandem.  You can compare the benefits of Bonus versus 179 in the chart attached.  

Contact your Perlson LLP representative with any questions regarding these matters at (516) 541-0022.

Comparison of 179 to Bonus

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