Maybe this is how you’ve been operating: deducting 100% of the purchase cost of a large asset in a single year, significantly reducing your tax liability for the year. However, the phase-out for this bonus depreciation begins this year.
Keep reading to learn what this 2023 bonus depreciation phase-out means for your business.
In this article:
- In 2023, the bonus depreciation phase out begins.
- Businesses can write off only 80% — instead of 100% — of an eligible property’s purchase price in 2023.
- In the years following, that percentage will reduce by 20 points each year until bonus depreciation is completely phased out by 2027.
What is asset depreciation?
Let’s start with the basics: what is asset depreciation?
First, the IRS definition: “Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.”
In layman’s terms, depreciation reduces a company’s tax liability over the years of that asset’s lifetime.
What is bonus depreciation?
Bonus depreciation is an accelerated business tax deduction. Rather than depreciating a large asset over the course of its lifetime, you write off a large chunk of the purchase price in a single year.
The bonus depreciation tax incentive was originally enacted by Congress in 2002 as an effort to encourage business’ investment following 9/11. Under this 2002 act, businesses could write off 50% of an eligible asset in a single tax year.
Fast forward to 2017, and Congress passed the Tax Cuts and Jobs Act (TCJA) — changing the game when it came to bonus depreciation. Under this new act, businesses could write off 100% of the cost of eligible property placed into service after September 27, 2017 and before January 1, 2023.
But we’re now past the January 1, 2023 cut-off date for 100% bonus depreciation. So what does that mean for your business? The bonus depreciation phase-out begins.
What is the 2023 bonus depreciation?
In 2023, businesses can write off up to 80% of the purchase price of an asset placed into service in the calendar year, and then depreciate the remaining 20% cost of the property over the course of several years.
Below is the full bonus depreciation phase-out schedule:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
Granted, Congress could always pass a new law that revises current rules. That’s why it’s important to work with a tax professional who stays up to date on the latest tax regulations.
Which assets qualify for depreciation?
For an asset to be depreciable, the IRS requires that it must be:
- Under your ownership
- Used to produce business income
- Have a lifespan of at least one year
- Placed in service during that tax year
Depreciable assets include:
- Machinery
- Vehicles
- Computers
- Office furniture
Keep in mind: this list isn’t exhaustive, and some assets qualify for regular depreciation, but not bonus depreciation. For example, the purchase of a building generally qualifies for regular — not bonus — depreciation; however, certain improvements on a building may qualify for bonus depreciation. When you work with a Landmark CPA, you can ensure you’re properly depreciating the correct assets.
Which assets cannot be depreciated?
Certain assets — like land and collectibles — cannot be depreciated. Depreciating vehicles can get hairy, too. When a vehicle is used for both business and personal use, there are certain stipulations when it comes to depreciation.
Does used property qualify for bonus depreciation?
Yes, used property does qualify for bonus depreciation, so long as:
- The taxpayer has not previously used the asset in any personal or business capacity (in other words, the asset may be used, but it is new to you)
- The property was not acquired in certain forbidden transactions (for example, acquisitions that are tax free or from a related person or entity)
Should your business take advantage of the 2023 bonus depreciation?
As with most tax-related questions, the answer is: it depends!
Taking an immediate deduction on a large chunk of an eligible asset can be a great advantage for some businesses by significantly reducing taxable income — reducing tax liability.
However, some businesses may want to depreciate an asset over the course of its lifetime. For example, if you are a startup business purchasing a large asset in a year with low revenue, it may be beneficial to depreciate this asset, reducing taxable income in future years when your revenue is higher.
There is also another piece of tax law, section 179, that some businesses may find a better fit for lowering tax liability, especially as the bonus depreciation phase out begins. In some cases, a business may be able to combine bonus depreciation and section 179 deductions in the same year. A Landmark CPA can help you determine the right tax strategy for your business.
Make smart tax decisions by working with a Landmark CPA
While you can no longer write off 100% of an asset using bonus depreciation in a single tax year, you can still access benefits of bonus depreciation up until the end of 2026. When you work with a Landmark CPA, we’ll help you make smart tax decisions based on the unique financial situation of your business.