Bonus depreciation is a tax provision that allows businesses to deduct a large portion of the cost of certain qualifying property in the year it is placed in service rather than having to depreciate the cost over several years. The 100% provision is intended to encourage businesses to invest in new equipment and other property by providing a more immediate tax benefit. However, the bonus depreciation will phase-out after 2022.
In 2017, the Tax Cuts and Jobs Act set bonus depreciation to 100% for qualified business assets acquired and placed into service after September 27, 2017, and before January 1, 2023. This generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances, and furniture generally qualify. Additionally, certain Qualified Improvement Property qualifies thanks to the CARES Act.
Unfortunately, the bonus depreciation deduction will begin to phase out after 2022, decreasing by 20 percentage points each year until it reaches zero in 2027.
The phase-out schedule will proceed as follows over the next five years:
| Year | 1st Year Bonus Depreciation |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
Some Businesses May Still Be Able to Use the Section 179 Deduction
While the bonus depreciation deduction is beginning to phase out, some businesses may still be able to use Section 179 to deduct the full cost of a purchased or financed asset. To qualify for the Section 179 deduction, the asset must be used for business purposes (at least 50% of the time) and placed in service during the tax year for which the deduction is being claimed. In addition, the business must meet certain other requirements. The maximum deduction amount is $1.08 million (for 2022), and the maximum amount of property that can be purchased is $2.7 million. There are also some restrictions on the type of property eligible for the deduction. For example, certain types of real estate, such as buildings and land, are not eligible.
If you are considering purchasing assets that could qualify for either bonus depreciation or the Section 179 deduction, we suggest speaking with one of our advisors first to determine an optimal tax-saving strategy.
This article is intended to provide a brief overview of the bonus depreciation deduction phase-out and is not a substitute for speaking with one of our expert advisors. Please contact our office if you would like more information or to speak with an advisor.