The Tax Cuts and Jobs Act made major changes to the rules on bonus depreciation for property acquired and placed into service between Sept. 27, 2017, and Jan. 1, 2027. Most significantly, it doubled the bonus depreciation deduction from 50% to 100% to allow businesses to recover the cost of capital acquisitions more quickly in order to stimulate the economy. It also extended the bonus to cover used property under certain conditions. It previously applied only to new property.
Depreciation is how companies spread out the cost of assets over the life of the asset through their business accounting. Bonus depreciation is a way for businesses to speed up depreciation and take a greater deduction up front. Businesses can claim a larger deduction for the cost of property in the first year it’s placed in service.
When the asset is placed in service, it marks the start of the depreciation period. Congress created bonus depreciation as an incentive for companies to purchase more assets. Bonus depreciation is also known as the additional first year depreciation deduction.
The new 100% bonus depreciation rate holds until 2022 and begins to phase down in 2023. In 2023, the bonus depreciation rate will be 80%, then 60% in 2024, 40% in 2025, and 20% in 2026.
Before these new laws were put into place, only new property qualified along with tangible personal property with a recovery period of 20 years or less, off-the-shelf computer software, and qualified improvement property.
The new tax laws now include qualified film, television, and live theatrical productions that are released, broadcast or staged live after Sept. 27, 2017 and used property. For used property to qualify for bonus depreciation, the taxpayer can’t use the property before acquiring it. And, the taxpayer can’t acquire it from a related party or a member of a controlled group of corporations.
Bonus depreciation must be taken in the first year that the item is placed into service. However, businesses can elect not to use bonus depreciation and instead depreciate the property over a longer period if they find that advantageous.
While the ability to immediately write off qualified property through using 100 percent bonus depreciation may seem like an obvious answer for many businesses, this may not always result in the best tax answer. The new tax laws also enhanced Section 179 expensing.
While Section 179 does have limitations that bonus depreciation doesn’t, such as being limited to taxable income, it may offer some additional flexibility that isn’t possible with bonus depreciation. Consult your Missouri management accounting team for advice on what makes the most sense for your company.
If you have any questions about how the new 100 percent bonus depreciation rules could benefit your company, please contact your Missouri business accounting team at Schultz, Wood, & Rapp.