Bonus Depreciation Phase Out Begins 1/1/2023

Bonus Depreciation Phase Out Begins 1/1/2023

The bonus depreciation phase out officially launched in January — what does it mean for your business?

Under the Tax Cuts and Jobs Act (TCJA), many businesses have benefited from a 100% bonus depreciation deduction on qualifying property acquired between September 27, 2017, and January 1, 2023. Leveraging 100% bonus depreciation has been a powerful tool for tax savings over the last several years. Businesses should be aware of the impact of the upcoming phase out when making future plans and purchases.

What is Bonus Depreciation?
Bonus depreciation is an accelerated form of depreciation that allows a business to deduct a larger amount of depreciation in the year of a qualifying asset’s acquisition than would be otherwise calculated. This serves to reduce the business’ taxable income and tax liability. Bonus depreciation can also be used to create a net loss for the business.

What is the Bonus Depreciation Phase Out?
The TCJA provided 100% bonus depreciation only through December 31, 2022. Starting on January 1, 2023, the percentage of allowable depreciation will be reduced annually by 20% until it reaches 0% in 2027. The breakdown of the phase out by year looks like this:

  • 2023: 80%
  • 2024: 60%
  • 2025: 40%
  • 2026: 20%
  • 2027: 0%

Businesses should take the phase-out into consideration when planning to purchase an asset as the decrease in the bonus depreciation percentage can impact their tax liability. They may also want to consider using Section 179 instead of bonus depreciation in the coming years. Although Section 179 has different rules than bonus depreciation, it does allow accelerated expensing in the first year a qualifying asset is placed in service.

Contact Leone, McDonnell & Roberts
If you have questions about the pending bonus depreciation phase out, Leone, McDonnell & Roberts can help. Contact us today to schedule an appointment with one of our financial professionals.

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