July 27, 2022
New equipment, machinery, new office furniture, business vehicles, and updated computer software are items that most businesses invest in from time to time. Since these can be expensive purchases, most will plan before buying by carefully crafting the annual budget to ensure enough capital is available. Although there are many considerations that must be made prior to asset acquisition, it is important not to forget about taxes. When making a large investment the last thing any business wants to do is pay more in taxes than is necessary.
For the last several years, many Atlanta businesses have taken advantage of the 100% bonus depreciation available when certain items (including those listed above) are acquired. Unfortunately, it appears that 2022 may be the last year the full 100% bonus depreciation is available. Absent Congressional intervention, bonus depreciation is scheduled to be reduced as of January 1, 2023. For this reason, it may be necessary to re-evaluate purchase plans. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
Normally, when a business buys certain types of equipment, the value is deducted over the course of its useful life. The timeframe depends on the type of asset and can be as long as 39 years (though most depreciation schedules are less than that). Matching income and costs over the asset’s useful life is considered to provide a more accurate picture of annual net income.
Bonus depreciation, on the other hand, allows companies to deduct a large portion of an asset’s cost in the year it was acquired and placed in service. Since 2018, thanks to the Tax Cuts and Jobs Act (TCJA), 100 percent bonus depreciation has allowed companies to deduct the full cost of a qualified asset in the year it was placed in service. Prior to TCJA, bonus depreciation was limited to 50 percent in the first year.
Immediately expensing the asset provided companies with a clear tax benefit and a source of cash flow to help offset the cost of large purchases.
This is a planned phaseout that goes back to the Tax Cuts and Jobs Act. Absent Congressional intervention – which seems unlikely before midterm elections – the bonus depreciation schedule will look like this:
Certain property with a long production time may qualify for an extended 100 percent bonus depreciation to December 31, 2023.
Most tangible assets will qualify for bonus depreciation. More specifically, the asset must have a recovery period of 20 years or less and be used in the business or in an income-producing capacity.
Water utility property and qualified film, TV, and live theatrical productions also qualify.
Bonus depreciation can apply to used assets if the company did not previously use it, and the asset cannot be from a related party. That means that like-kind exchanges or transfers between a component member of a controlled group of corporations are ineligible.
Listed property, which are assets used for both business and personal use, can apply in certain circumstances. The asset must be used in the business more than 50 percent of the time. A business vehicle is a common example.
There are also exclusions, including:
Bonus depreciation is elected on the annual tax return in the year the asset was placed in service. It’s not automatic. It’s claimed on line 14 of Form 4562. Previously filed returns where bonus depreciation wasn’t elected can be amended within six months. Once bonus depreciation is elected, it cannot be revoked without IRS consent.
The depreciation allowance is calculated by multiplying the depreciable basis of the property by the applicable percentage. Factors impacting the depreciable basis include Section 179d, certain tax credits, and the Sec. 181 expense deduction.
There are some situations where expensing an asset over the course of its useful life may be more beneficial; startups or companies with low net income may prefer to spread out the tax savings over several years. Additionally, bonus depreciation must be taken on an entire asset class; companies cannot pick and choose which assets will receive the accelerated depreciation if there is more than one in an asset class – buying more than one copier or piece of equipment, for example.
Companies will also want to compare the tax advantages of bonus depreciation and the Section 179d deduction. Both methods can result in favorable tax treatment though they differ in requirements and unique advantages. For example, bonus depreciation doesn’t require a company to have net income nor is it capped at a certain dollar amount. Section 179d has more flexible timing and covers real estate improvements, which bonus depreciation does not. Sec.
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While now might be a great time to evaluate strategic capital purchases, it depends on circumstances, the company’s tax position, and available cash flow, among other factors. Every Atlanta business is different and should carefully their situation before making changes. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.