100% bonus depreciation will begin to phase out after December 31, 2022 and will phase out by 2027. The current law, passed under the Tax Cuts and Jobs Act of 2017 gives business’s the option to depreciate a larger percentage of qualified assets from their taxes in the first year the asset is placed in service, rather than spread over the useful life of the asset. This provides business owners with a significant upfront deduction, which can be used for capital improvements. Unlike other options, bonus depreciation is not limited to a dollar amount.
Business owners have the option to elect to expense qualified business property in the year the property is first placed in service. Qualified property includes depreciable business assets with a recovery time of 20 years or less, including machinery, equipment, vehicles, computers and furniture. It excludes land or buildings. The qualified property can be new or used and must be in-use the year in which you deduct it from your taxes. The inclusion of used property has been a significant, and favorable, change from previous rules.
Accelerating Capital Improvement Timing
If the business already has plans to begin capital improvements, then you may want to take full advantage of the increased bonus depreciation, you should consider accelerating your timing of the capital improvement plans before the program is set to expire. Barring any Congressional decision to extend the program, bonus depreciation will be reduced as follows:
- 80% for property placed in service between January 1, 2023, and December 31, 2023.
- 60% for property placed in service between January 1, 2024, and December 31, 2024.
- 40% for property placed in service between January 1, 2025, and December 31, 2025.
- 20% for property placed in service between January 1, 2026, and December 31, 2026.
After bonus depreciation expires, businesses can claim yearly depreciation deductions based on the property’s useful life.
Alternative to Section 179
Since many states do not conform to bonus depreciation, companies may be able to claim IRC Section 179 benefits in its place. Similar to bonus depreciation, the program allows companies to deduct 100% of qualified property in the year the asset is placed in service. The program differs from bonus depreciation in a few ways:
- Section 179 provides for more flexibility with regards to timing. For example, you can split the deduction by claiming 50% in the first year while dispersing the remaining 50% deduction throughout the lifetime of the asset. This is not available when utilizing the bonus depreciation method.
- You can utilize Section 179 for real estate improvements, such as installing a new roof, which is not allowed through bonus depreciation.
- You are limited to a $1,080,000 deduction for 2022 with Section 179. There is no maximum deduction utilizing the bonus depreciation method.
If you choose to utilize this program, you should plan to invest in your capital improvement projects before the end of the year. After December 31, 2022, the program benefits begin to phase out 20% each year through 2026. If bonus depreciation is not available in your state, consider utilizing IRC Section 179. For more information, see the IRS FAQ page on the topic or reach out to your CPA on how to optimize either program’s advantages.
If you would like to learn more about lending options for your hospitality assets please contact NewGen Advisory.