All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 percent bonus depreciation.
Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property. But starting in 2023, bonus depreciation is scheduled to decline 20 percent. It will decline each year until it reaches zero in 2027.
What does this mean for you and 100 percent bonus depreciation?
For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. But, if you wait until 2023, you’ll be able to deduct only $80,000 (80 percent).
Does this mean you should rush out and purchase business property before 2022 ends? Will it allow you to take advantage of the 100 percent bonus depreciation? Not necessarily. For your business, an alternative may not be going away: IRC Section 179 expensing.
Both IRC Section 179 expensing and bonus depreciation may allow you, business owners, to deduct in one year the cost of most types of tangible personal property, plus off-the-shelf computer software. They both can be used for new and used property obtained by purchase from an unrelated party. They can both also can be used to deduct various non-structural improvements to non-residential buildings after they are placed in service.
Moreover, the two deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit. You can then claim bonus depreciation for any remaining basis. Starting in 2023, when bonus depreciation will be less than 100 percent, any basis left after applying Section 179 and bonus depreciation will be deducted with regular depreciation over several years.
There are some significant differences between the two deductions:
- Section 179 expensing is subject to annual dollar limits that don’t apply to bonus depreciation. But the limits are so large that they don’t affect most smaller businesses.
- Section 179 expensing requires more than 50 percent business use to qualify for and retain the Section 179 deduction. For bonus depreciation, you face the more than 50 percent business use requirement only for vehicles and other listed property.
- Unlike bonus depreciation, Section 179 expensing is limited to your net taxable business income (not counting the Section 179 deduction) and cannot result in a loss for the year.
- The 2022 Section 179 deduction is limited to $27,000 for SUV’s. There is no such limit on bonus depreciation.
- You can use bonus depreciation to deduct land improvements with a 15-year class life. These land improvements may include such things as sidewalks, fences, driveways, landscaping, and swimming pools.
Generally, you do not need to purchase and place the property in service by the end of 2022 to take advantage of 100 percent bonus depreciation. But there can be exceptions.
For example, if you own a rental property and want to make large landscaping or other land improvements, you’ll get a larger one-year depreciation deduction using 100 percent bonus depreciation in 2022 than if you wait until 2023, when the bonus will be only 80 percent.
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