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When the Tax Cuts and Jobs Act (TCJA) was signed into law in 2017, it included many beneficial tax provisions for businesses. One of the most notable was an increase in the bonus depreciation allowance from 50% to 100%. However, the bonus depreciation allowance is scheduled to phase out over a period of four years, beginning in 2023.

How Will the TJCA Bonus Depreciation Phase Out?

The TJCA Bonus Depreciation allowed a 100% depreciation allowance for qualifying property placed in service from September 27, 2017, to December 31, 2022. This meant that your business could deduct the full cost of qualifying property in the year it was placed in service rather than depreciating it over a longer period of time.

However, the 100% write-off of eligible property expired on December 31, 2022. Starting this year, 2023, the percentage of the cost of qualifying property that can be deducted will decrease by 20% each year until it reaches 0% in 2027.

The phase-out schedule is:

• 2022: 100%

• 2023: 80%

• 2024: 60%

• 2025: 40%

• 2026: 20%

• 2027: 0%

What Counts as Qualifying Property?

Qualified property are depreciable assets with a recovery period of 20 years or less. This includes vehicles, furniture, manufacturing equipment, and heavy machinery. In addition, it was updated to include computer software and qualified improvement property (QIP).

Planning Ahead

Although the TJCA bonus depreciation has started phasing out and is now 80%, your business may still benefit from it. Also, your business may benefit from Section 179, which is expected to be fully available in future tax years and allows for expensing of many business asset purchases. However, in both instances, tax planning for the future will optimize your business’s tax liability.

Have questions about tax planning for the phasing out of TJCA’s bonus depreciation? Contact our team of business tax planning experts to help.