Navigating Bonus Depreciation

The Tax Cuts and Jobs Act of 2017 (TCJA) had a tremendous impact on bonus depreciation. It significantly expanded which assets may qualify for bonus depreciation and established 10 years of bonus availability from Q4 of 2017 all the way through the end of 2026.

Ten years of predictable rates allow real estate developers and professionals to strategically plan, incorporating bonus depreciation into their projections. The TCJA also removed the previous restrictions that prevented bonus depreciation on acquisitions.

The future of bonus depreciation rates remains uncertain and is subject to economic conditions and government policies.

The Bonus Rate Transition

The bonus depreciation rate changed significantly starting at the end of September 2017. Initially, there was a period of 100% bonus depreciation, which meant that property owners could expense by way of depreciation 100% of the cost of eligible assets in the year they were placed-in-service. Eligible assets must have a MACRS class life of 20 years or less. This 100% bonus period lasted through the end of 2022.

However, the rate then began to step down at the start of 2023, decreasing by 20% each year. This means that the rate will gradually reduce to 80% in 2023, 60% in 2024, 40% in 2025, and finally 20% in 2026. The transition step-down means that planning ahead is crucial in capturing the best possible bonus rate.

Practical Steps for Maximizing Bonus Depreciation

Planning and timing are critical to maximize bonus depreciation benefits. Bonus rate is determined by the year in which a property was placed-in-service. This means that projects must be completed, and assets placed-in-service, within a given tax year to qualify for the bonus rate of that year.

This planning can be particularly crucial for acquisitions and renovations, as the placed-in-service date will have a significant impact on the depreciation benefits. Even if you are not sure whether you will have enough income in the year of acquisition to benefit from the deduction, placing assets in service in that year locks in the better bonus rate. In this scenario, a look-back study may be employed in future when income becomes sufficient, to capture depreciation retroactively.

Moreover, staying informed about state regulations is essential. Many states have decoupled from federal bonus depreciation rules. This means that mapping out state tax liabilities becomes more straightforward as bonus depreciation phases out.

The Role of Section 179 Expensing

While bonus depreciation is still the primary focus for many, it's worth considering Section 179 expensing for certain assets. Section 179 allows businesses to expense the cost of certain assets in the year they are acquired, rather than depreciating them over time.

While Section 179 has its limitations and phase-out thresholds, it may be an attractive option for specific assets that don't qualify for bonus depreciation.