The Sun is Beginning to Set on Some Depreciation Tax Provisions
The Tax Cuts and Jobs Act of 2017 (TCJA) is one of the most significant pieces of tax legislation in the last 25 years. Passed in November 2017 and effective January 1, 2018, this legislation was designed to simplify individual tax rules, while also reducing tax rates for businesses and individuals.
The tax provisions included in the TCJA were not permanent, however. Unless Congress acts to extend them, many of these provisions, including the increased standard deduction and the qualified business income deduction will expire on January 1, 2026. But 2026 is not the first year that we will see a reduction in some of the beneficial tax provisions of the TCJA.
One of the significant provisions of the TCJA relates to the bonus depreciation rules. These rules allow business taxpayers to write off the entire cost of newly purchased long-term assets in the year placed in service, rather than deduct the cost of these assets over the asset’s useful life. The bonus depreciation provision extended to depreciable long-term assets with a useful life of 20 years or less. This would include most vehicles and equipment. Additionally, the bonus depreciation provisions apply to multi-use agricultural buildings, like a tool shed.
Beginning in 2023, the bonus depreciation provisions of the TCJA begin to phase out. For this year, instead of a 100% bonus depreciation deduction, the maximum write-off is reduced to 80% of the cost of the asset. The remaining 20% of the cost is required to be deducted over the IRS designated useful life of the asset. The bonus depreciation percentage will continue to decrease over the next several years, until this provision is fully eliminated in 2027.
The impact of this reduction in 2023 will not be significant to most small taxpayers. Continuing Section 179 provisions allow for the deduction of up to $1,160,000 in cost of long-term assets placed in service in 2023. Most small taxpayers can continue to use these Section 179 provisions to get the same result as the old bonus depreciation provisions. There are two categories of taxpayers that may feel more of an impact from the reduced bonus depreciation provisions, however.
First, farmers that construct a multi-use agricultural building (for example a tool shed) in 2023 or later will be impacted by the reduced bonus depreciation provisions. This is because Section 179 does not apply to assets with a depreciable life greater than 15 years. As multi-use agricultural buildings have a depreciable life of 20 years, Section 179 does not apply, and bonus depreciation will be limited to 80% of the cost. The remaining cost of the building must be written off over the 20-year depreciable life.
Second, larger businesses that expend more than $1,160,000 on long term assets in 2023 will maximize the Section 179 deduction. Any cost of long-term assets more than this must be depreciated over the useful life of the asset. In addition, businesses that spend more than $2,890,000 on long term assets will find their available Section 179 deduction reduced below the $1,160,000 maximum.
2023 is just the start of the sunset for many of the provisions of the TCJA. The bonus depreciations provisions will continue to decrease in future years. If you plan on purchasing long-term assets for use in your business or farm operation in the near future, please consult your tax advisors at Moorman, Harting and Company to discuss how best to plan these purchases to manage your tax liability.