Bonus Depreciation Extended Through 2026 under the Tax Cuts and Jobs Act (“TCJA”)

Bonus depreciation is a significant tax benefit that allows businesses to deduct a percentage of the cost of qualifying assets in the year (even the day, as in when the asset is purchased on NYE) the asset is placed in service, rather than spreading the deduction out over several years. This is a much faster depreciation schedule (aka cost recovery schedule) than straight line depreciation. This tax benefit can provide a significant financial advantage to businesses that are making large investments in their operations, and in particular for real estate investors buying real property. By allowing businesses to deduct the full cost of qualifying assets in the first year, bonus depreciation can help to reduce taxable income and lower a business’s overall tax burden. This can provide businesses with more cash flow, which they can use to reinvest in their operations, make capital improvements, or pay off debt.

Additionally, unlike Section 179 deductions, bonus depreciation is not limited to annual taxable business income and, as such, can be used to create a net loss which, in some cases, can offset a taxpayer’s actual income. (Coming soon, we will write about real estate professional status and how to combine the synergistic strategies to absolutely master income tax mitigation. Also, see here, for Ferd’s podcast covering bonus depreciation and cost segregation in detail.) Also, net losses can be carried forward to offset income in future tax years. For real estate transactions, a real estate professional can claim bonus depreciation on qualified assets purchased as part of a commercial property closing, which may create losses in year one for that professional that can be used to offset future income.

In general, bonus depreciation is available for new assets with a recovery period of 20 years or less, such as machinery, equipment, and furniture. Under the TCJA, aka Trump Tax Cut Law, (the “Act”) businesses can deduct 100% of the cost of qualified assets in the first year of service, up to certain limits and subject to the percentage reduction based on the tax year (more on this below, noting it is now too late for 100% bonus depreciation). This represents a significant increase from the previous bonus depreciation rules, which allowed for a deduction of 50% of the cost of qualified assets in the first year.

Details of the Bonus Depreciation Extension

The Act was a major tax reform law that brought about significant changes to the Internal Revenue Code. Among its many provisions, the Act included an increase in first-year bonus depreciation to 100% for qualified assets placed in service after September 27, 2017. This was a significant change that provided businesses with a tax incentive to make capital investments in their operations.

The Tax Cuts and Jobs Act included an extension of bonus depreciation through 2026. Under the extension, and subject to the percentage reduction based on the tax year as discussed below, businesses can continue to deduct 100% of the cost of qualified assets in the first year of service, up to certain limits. This means that businesses can continue to take advantage of this valuable tax benefit for the next several years.

The extension includes a gradual reduction in the bonus depreciation percentage each year. After January 1, 2023, the bonus depreciation percentage will gradually decrease as follows:

80% for property placed in service after December 31, 2022, and before January 1, 2024.

60% for property placed in service after December 31, 2023, and before January 1, 2025.

40% for property placed in service after December 31, 2024, and before January 1, 2026.

20% for property placed in service after December 31, 2025, and before January 1, 2027.

How to Take Advantage of Bonus Depreciation

Bonus depreciation is reported by filing a statement with on IRS Form 4562 “Depreciation and Amortization” by the due date of the taxpayer’s Federal tax return for the applicable taxable year (including extensions). To take advantage of bonus depreciation, businesses must meet certain eligibility requirements and follow specific rules. Some of the key considerations include:

Qualifying assets: Bonus depreciation is only available for certain types of assets, such as machinery, equipment, and furniture. Businesses must ensure that the assets they are investing in qualify for bonus depreciation.

Timing: Bonus depreciation is only available for assets that are placed in service during the year that the business is claiming the deduction. Businesses must carefully time their investments to ensure that they are taking advantage of the tax benefit.

Recordkeeping: Businesses must maintain accurate records of their assets and the amounts claimed for bonus depreciation. This is important for tax reporting purposes and can help to avoid errors or audits.

Even though bonus depreciation in 2023 is only 80%, as compared to 100% in prior years, now is the time for businesses to review their tax strategy and identify opportunities to invest in qualifying assets. By working with a tax professional, businesses can ensure that they are taking full advantage of this valuable tax benefit and minimizing their overall tax burden.

Of note, bonus depreciation (often referred to by accountants as “accelerated cost recovery”) is an amazing tool but if/when you sell the property you are subject to “cost recovery recapture”. The time value money often still makes this tool worthwhile, and it can be used in tandem with other tax avoidance strategies such as 1031 exchanges (and combined with PPMs and syndications), DSTs, and TIC drop and swap. In all humility, we pride ourselves on being the attorneys who pride themselves on understanding the math, and the law in syndications. (Hint: the blue text means we have nuggets of wisdom already recorded or written on this topic – click on the blue text!)

Remember, there is a difference between tax avoidance and tax evasion. The difference … 5-10 years. In prison. Tax evasion, bad! Tax avoidance is good – it is smart and the ideal tax planning strategy.