Most taxpayers have gotten very used to taking 100% bonus depreciation. Most of the time, people have been getting used to taking 100% bonus and writing off whatever they’re spending on capEx. This has been the case since the Tax Cuts and Jobs Act in 2017 – the Trump tax cuts.
You may be thinking that this is going to happen for this year, and for next year. It happened last year, so why wouldn’t it? It’s been very fruitful for cost segregation studies, etc.
2022 was the last year that we had 100% bonus depreciation because the depreciation rules changed.
The way that the Tax Cuts and Jobs Act is written, there’s a sunset provision where starting in 2023, there’s going to be a phase out of the total depreciation amount. Starting in 2023, the deduction has gone down to 80% while 2024 will go down to 60%.
This now a very pertinent topic in our conversations when we’re talking about budgets.
For example, we have a client and they were looking at spending about a million dollars down upgrade to one of their facilities. And under the rules, as of today, they could write off that million dollar investment into their facilities.
Under new depreciation rules going into this year (2023) that would be limited to $800,000. We’ve gone from a 100% deduction to an 80% deduction. Next year in 2024 the limit would be $600,000 since we will go from 80% deduction to 60% deduction.
What that means is that you may want to consider making those improvements in 2023 vs. 2024.
This isn’t the only way to get bonus depreciation.
But like with everything in the tax law, this isn’t the only way to get bonus depreciation. There’s another code section called section 179. Taxpayers used to use that a lot before bonus depreciation, but bonus depreciation got introduced about ten years ago, and most taxes got very used to 100% right off with almost no limitations. Now we have a phase out where 100% turn into 80%. So, section 179 is going to become more of an important code section for taxpayers looking for write offs in the coming years.
For awhile, you’ll be able to use these in tandem, which makes calculations complicated but worth the savings. Connect with us to figure out maximum write-offs for fixed assets and improvements of jobs.
