Bonus Depreciation and Its Phaseout: Essential Insights

As a business owner, staying ahead of tax changes is crucial, especially when it comes to maximizing deductions that directly impact your bottom line. One such deduction that has been a game-changer for many businesses is bonus depreciation. However, with upcoming changes to this provision, it’s important to understand what’s happening and how it could affect your tax planning. At 9FIFTEEN Accountants, we specialize in helping businesses like yours navigate these tax changes to ensure you’re making the most of every opportunity.

What Is Bonus Depreciation?

Bonus depreciation allows businesses to deduct a significant portion of the cost of eligible assets, such as machinery, equipment, and software, in the year they are placed in service. This immediate deduction can greatly enhance your cash flow by reducing your taxable income right away, instead of spreading the deduction out over several years.

The Tax Cuts and Jobs Act (TCJA) of 2017 made this provision even more attractive by allowing for a 100% deduction of the cost of qualifying assets placed in service between September 27, 2017, and December 31, 2022. This was a significant increase from the previous 50% allowance and was available for both new and used property, making it accessible to a broader range of businesses.

How Does Bonus Depreciation Work?

To take advantage of bonus depreciation, your business must place qualifying assets into service within the specified time frame. Eligible assets typically include:

Machinery and Equipment: Essential for manufacturing, production, and other business operations.
Computers and Software: Vital for IT infrastructure and digital operations.
Qualified Improvement Property: Improvements to the interior of nonresidential real property.

When you purchase these assets, instead of depreciating them over their useful life, you can deduct the entire cost in the year they’re placed in service, which can significantly reduce your taxable income for that year.

The Phaseout of Bonus Depreciation: What You Need to Know

While the 100% bonus depreciation has been a boon for many businesses, it’s important to be aware that this benefit is being phased out. Here’s the schedule for the phaseout:

2023: 80% bonus depreciation
2024: 60% bonus depreciation
2025: 40% bonus depreciation
2026: 20% bonus depreciation
2027 and Beyond: No bonus depreciation

As these percentages decrease, the immediate tax benefits of bonus depreciation will also diminish. This means you’ll be able to deduct less in the year the asset is placed in service, with the remaining cost being depreciated over its useful life.

How the Phaseout Affects Your Business

The phaseout of bonus depreciation is something that all business owners should consider in their tax planning. Here’s how it could impact your business:

Timing of Purchases: If you’re planning to invest in new equipment or property, it may be beneficial to do so sooner rather than later. Taking advantage of the higher bonus depreciation rates available in 2023 and 2024 could maximize your immediate tax benefits.
Cash Flow Considerations: With the reduction in bonus depreciation, your business might need to adjust its cash flow planning. The reduced immediate deductions could mean higher taxable income and, therefore, a higher tax liability.
Long-Term Tax Planning: As bonus depreciation phases out, it’s essential to explore other tax strategies to manage your liabilities. This could include utilizing Section 179 expensing or conducting cost segregation studies to identify shorter-lived assets that can still benefit from accelerated depreciation.

Maximizing Your Tax Benefits as Bonus Depreciation Phases Out

While the phaseout of bonus depreciation may reduce immediate tax benefits, there are still strategies available to help manage your tax liability:

Section 179 Expensing: This allows businesses to deduct the full cost of qualifying property up to a certain limit in the year it is placed in service. Although it has limitations, it can still be a valuable tool as bonus depreciation decreases.
Cost Segregation Studies: These studies can help you identify components of a property that can be depreciated over shorter recovery periods, allowing for accelerated depreciation and potential tax savings.

Why Tax Planning Matters

With changes to bonus depreciation on the horizon, it’s more important than ever to have a solid tax plan in place. By staying informed and proactive, you can manage your tax liabilities effectively and keep your business financially healthy.

At 9FIFTEEN Accountants, we’re experts in tax planning, and we’re here to help you navigate the phaseout of bonus depreciation. We’ll work with you to ensure your tax strategy is optimized, and that you’re making the most of all available deductions.

Need help with your tax planning? Schedule a call with us today to discuss how we can help you prepare for the phaseout of bonus depreciation and find other ways to maximize your tax savings.

Navigating the complexities of tax law is crucial for your business’s success. Let 9FIFTEEN Accountants be your guide to optimizing your tax strategy and ensuring your business thrives.

9FIFTEEN Accountants | Your Partner in Tax and Accounting Solutions