September 19, 2019
The Tax Cuts and Jobs Act of 2017 (tax reform) challenged some long-held assumptions many businesses have about how and when to use bonus depreciation. The changes ushered in through tax reform have transformed how to use bonus depreciation allowing for an expansion of benefits in some respects and a contraction in others. Atlanta business owners that rely on bonus depreciation as part of their tax savings strategy need to be aware of the changes and how it will impact their approach. To help clients, prospects, and others, Wilson Lewis has provided a comprehensive summary of the changes and key considerations below.
Bonus depreciation is one of those tax laws that change frequently, sometimes every year. Just before tax reform was passed, this is what bonus depreciation looked like for both individuals and businesses:
Taxpayers had the option to immediately expense 50% of all qualifying new assets they placed into service. This “bonus” depreciation expense was available to use on the property with useful lives [for tax purposes] of 20 years or less, which for most taxpayers included items like:
It was also available for qualified improvement property (QIP), which is a class of property that was created just a few years earlier from different legislation called the Protecting Americans from Tax Hikes (PATH) Act. QIP is defined as improvements to the interiors of nonresidential real property that were made after the date the buildings were first placed in service. The definition explicitly excludes building expansions, escalators, or changes to the building’s internal structure.
After tax reform, a few of these rules changed.
100% Bonus
| Calendar Year | Bonus Percentage |
| 2018 – 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% – no bonus available |
Any property that is purchased on September 28, 2017, through the end of 2022 is eligible for 100% bonus depreciation, not just 50%. However, beginning in the tax year 2023, this percentage phases out, dropping 20 percentage points each year until it expires in 2027.
New assets with useful lives of 20 years or less continue to be eligible for bonus depreciation. Post-TCJA, used property is also eligible, but on one condition: it must not have been eligible for depreciation by the taxpayer (or their predecessor) previously. In other words, both new and used property can now be fully expensed under bonus depreciation guidelines.
Thanks to a mistake when drafting the language in the TCJA, QIP is no longer eligible for bonus depreciation. Congress intended for QIP to remain eligible for bonus treatment, but the language of the law effectively pushed QIP out of the running by assigning it a useful life of 39 years rather than 15. Currently, there has not been a technical correction to fix this mistake, so QIP cannot be depreciated using bonus. This is a particularly harsh blow because the TCJA also expanded the definition of QIP to include roofs, HVAC equipment, fire alarms, and security systems which had previously been recovered over 39 years.
Taxpayers should review at their practices to see if they are taking advantage of these expanded opportunities for bonus depreciation. The 100% deduction will only be available for a few more years, and taxpayers who will benefit from taking accelerated depreciation deductions should plan their expenditures carefully.
Not all taxpayers will benefit from bonus depreciation. Sometimes, spreading expenses out over the years will help taxpayers save taxes over time. Fortunately, taxpayers can opt-out of bonus depreciation if they so choose. They can elect out of bonus depreciation across the board or for just one or two of their asset classes (e.g. all five-year property). They should work with professionals they trust who can refine their strategies under the TCJA’s new regime.
Bonus depreciation should be just part of your overall tax strategy, and truthfully, just part of your depreciation strategy. Section 179 expensing, another form of accelerated depreciation, should also be something you consider. Since tax laws are frequently changing it’s important to take advantage of these opportunities while they are in effect. If you have questions about the new bonus depreciation rules or need assistance with a tax planning issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.