Understanding Bonus Depreciation Deductions for 2023, 2024, and 2025
Bonus depreciation has been a powerful tool for businesses looking to accelerate their tax deductions. This provision allows businesses to immediately deduct a large percentage of the cost of eligible assets. Some of these assets such as machinery, equipment, and certain improvements, rather than depreciating those costs over the asset’s useful life. Let’s break down the key changes to bonus depreciation for 2023, 2024, and 2025, and explore what happens when the Tax Cuts and Jobs Act (TCJA) sunsets in 2025.
Bonus Depreciation in 2023, 2024, and 2025
2023: The year 2023 marks a significant reduction in the bonus depreciation percentage. Following the TCJA’s original provisions, the bonus depreciation rate dropped from 100% to 80% for assets placed in service after December 31, 2022. This means that businesses can immediately deduct 80% of the cost of eligible assets, with the remaining 20% being depreciated over the asset’s useful life.
2024: The bonus depreciation percentage decreases further in 2024. For assets placed in service after December 31, 2023, the rate drops to 60%. This continued phase-down means that only 60% of the cost of eligible assets can be deducted upfront. The remaining balance is then depreciated over time.
2025: In 2025, the bonus depreciation percentage decreases to 40% for assets placed in service after December 31, 2024. This reduction reflects the gradual phase-out of the TCJA’s enhanced bonus depreciation provisions.
Have you been enjoying our blogs? The good news is you can join our newsletter. Our blogs cover several topics that any business owner should be aware of. To sign up just click the button below.
What Happens When the TCJA Sunsets in 2025?
The Tax Cuts and Jobs Act, enacted in 2017, made sweeping changes to the tax code. It included the temporary enhancement of bonus depreciation. However, these provisions are scheduled to sunset after 2025. This means that without further legislative action, bonus depreciation will significantly revert to pre-TCJA levels.
If the TCJA sunsets as scheduled:
- 2026 and Beyond: Bonus depreciation will be reduced to 0% for most new and used property. This will effectively end the immediate expensing of assets under this provision. Businesses will have to revert to the Modified Accelerated Cost Recovery System (MACRS) for depreciation. MACRS spreads the cost of an asset over its useful life, generally resulting in smaller deductions each year compared to the accelerated depreciation allowed under bonus depreciation.
- Impact on Tax Planning: The sunset of the TCJA will likely have significant implications for tax planning. Businesses may rush to place assets in service before the end of 2025 to take advantage of the remaining bonus depreciation. Beyond 2025, businesses will need to adjust their tax strategies, possibly focusing more on Section 179 expensing or other depreciation methods that remain available.
Conclusion
The phase-down of bonus depreciation in 2023, 2024, and 2025 represents a major shift for businesses accustomed to the 100% deduction allowed in previous years. With the scheduled sunset of the TCJA in 2025, it’s crucial for businesses to plan accordingly. This means maximizing their depreciation deductions while they last and preparing for the return to more traditional depreciation methods. As always, businesses should consult with their tax professionals. At Whittaker we help our clients make the most of these provisions and adapt to the changing tax landscape.
To get in touch with us click here.
