It’s Year-End…Let’s Find Some Deductions!

Fixed asset reviews and repair and maintenance studies can be effective tools in year-end tax planning.  Prior to December 31, 2022, taxpayers were able to benefit from 100% bonus depreciation on certain assets for federal and (possibly) state income tax purposes.  The amount of allowable bonus depreciation began to be reduced effective January 1, 2023.  This rate will continue to reduce ratably over the next four years: 80% will be allowed for property placed into service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.  In less than a couple weeks, that 20% decrease in the bonus depreciation amount could have a significant impact to taxpayers.

A fixed asset review involves evaluating a company’s records, and specifically their fixed assets, to ensure proper classification, to verify the correct depreciation method, to re-calculate depreciation expense, and to confirm prior tax reporting.  This assessment can identify opportunities to accelerate depreciation expense through reclassification of long-lived assets (39 years or 27.5 years) to shorter-lived assets (Section 1245 personal property, land improvements, qualified improvement property, etc.).

A repair and maintenance study is the process of reviewing a company’s capital expenditures to determine whether certain costs incurred should be treated as repairs and maintenance items for immediate deduction under Section 162, rather than being capitalized under Section 263(a) as an improvement to the property.  In general, expenses incurred for assets that do not result in a betterment, restoration, or adaptation to the Unit of Property (UOP), as defined in the Tangible Property Regulations (TPRs), could be considered a deduction. For a reminder on the TPRs, click here.

Thanks to Agatha Li for authoring this blog post!