The Phase-Out of Bonus Depreciation and Its Effect on Your Business

By Michael J. Andriola, CPA, Partner and Valerie Imondi, CPA, Senior Manager 

Since 2017 under the Tax Cuts and Jobs Act (the Act), businesses have been benefiting from a provision which has allowed 100% bonus depreciation on qualified assets such as busses, vans and other transportation vehicles to name a few. This benefit is expected to begin phasing out starting as soon as the end of 2022. With this change on the horizon, it is crucial that these businesses have a tax plan in place not only to address how this will impact the replacement of vehicles in its fleet during 2022, but for future years as well.

Observations and Planning Considerations

Under the Act, qualified assets acquired and placed in service after September 27, 2017 and before January 1, 2023 are entitled to take 100% bonus depreciation. After 2023, bonus depreciation available will drop, as follows:

• 80% for property placed in service in 2023
• 60% for property placed in service in 2024
• 40% for property placed in service in 2025
• 20% for property placed in service in 2026
• 0% for property placed in service in 2027 and later years

Businesses will continue to have the benefit of Section 179 which is expected to be fully available in future tax years. The Section 179 deduction allows expensing of many business asset purchases, similar to bonus depreciation. However, unlike bonus depreciation, the Section 179 deduction is limited. The Section 179 deduction limit for businesses in 2022 is $1,080,000 and there is a phase-out of the deduction that starts once qualified assets exceed $2.7 million. Unlike bonus depreciation, Section 179 deductions cannot result in a tax loss and can only be taken to the extent of taxable income. Consequently, depreciation caps may come into play, depending on how many vehicles in your fleet you need to replace.

Regular depreication will also continue to be available to businesses. Regular depreciation is calculated evenly over a number of years fixed by law for the particular type of item. There are no limits or phase-outs when taking regular depreciation.

The option to elect the de minimis safe harbor is also still available to businesses for tax years 2022 and beyond. The de minimis rules allow a taxpayer to deduct up to $2,500 for tangible property acquired (increased to $5,000 if applicable financial statements are prepared), regardless of whether the tangible property meets the definition of a purchase that would normally be capitalized.

Look Ahead

The end of bonus depreciation could be a significant change for businesses that have been relying on it for business and tax planning. Modeling of how the future state will affect taxable income on an annual basis is imperative. While tax incentives, such as bonus depreciation and Section 179, can be a beneficial tool while tax planning, these provisions should be used only when it makes financial sense for your business. It is important to always consider your cash-flow requirements and overall tax strategy when considering these depreciation provisions. Combining the Commercial Clean Vehicle Credit with the remaining bonus depreciation and Section 179 provisions could help to finance the increased cost of a new fleet of energy-efficient vehicles.

Contact Us

Determining whether to take bonus depreciation can include many variables and can seem overwhelming. If you have any questions, contact your client service partner:

Michael J. Andriola, CPA
Partner
mandriola@pkfod.com | 908.967.6815

Valerie Imondi, CPA
Senior Manager
vimondi@pkfod.com | 845.670.7111

Christopher Migliaccio, JD
Principal
cmigliaccio@pkfod.com | 646.699.2890