You may still depreciate 100%…if you act before 12/31/22.

By Michael Smith, CLA International Tax Principal

Historically, assets were purchased and depreciated over their useful lives (e.g., 5, 7, 10 years, etc.).  To stimulate economic growth, starting in 2017, the Tax Cuts and Jobs Act of 2017(1) increased the “bonus” depreciation opportunity to 100% of qualified items in the first year. Qualifying items include furniture, machinery, certain types of vehicles, computers, and other tangible property with a recovery period of 20 years or less.  While some equipment for improving the interior of a building may qualify, the building itself will not quality.

The days of 100% bonus depreciation are numbered.

As we wind down 2022, companies should be aware that bonus depreciation will start to change.  Rather than the 100% full expensing we have grown comfortable with the past several years, the bonus depreciation will wind down as follows(2):

• 80% in 2023
• 60% in 2024
• 40% in 2025
• 20% in 2026
• 0% in 2027 (program sunsets)

Businesses looking to take advantage of 100% bonus depreciation on qualified property in 2022 should execute their purchase contracts as soon as possible (i.e., prior to 12/31/2022) and confirm the property meets the “placed-in-service” requirement (acquire after September 2017 and use before January 1, 2023).  Generally speaking, the asset must be in a condition or state of readiness and available for its specific function in connection with generating business or investment income by the end of this year.(3).   Aside from certain restrictions, you might still be able to take advantage of unclaimed deductions on items you bought and started using after September 2017.

If you are in the process of negotiating the purchase of an asset, the earliest the asset can be considered placed-in-service is the date on which you sign the purchase price agreement (4).  The placed-in-service date will be later than purchase agreement execute date if property is not ready for its intended use at the time the contract was inked (5). 

Need help weighing options and determining what qualifies?  Contact us for a costing study.

Sources

1. Sec. 168(k)(6)(A)(i), as amended by Act Sec. 13201(a)(2) of P.L. 115-97
2. (Sec. 168(k)(6)(A)(ii) – (v)
3. Reg. §1.167(a)-11(e)(1)(i); Prop. Reg. §1.168-2(l)(2) (interpreting ACRS)
4. Wilkison v. Commissioner, 55 T.C.M. 1635, 1636 (1988), aff’d by unpub. op., 874 F.2d 814 (5th Cir. 1989)
5. Von Kalinowski v. Commissioner, 65 T.C.M. 1788 (1993), rev’d on other grounds by unpub. op., 45 F.3d 438 (9th Cir. 1994)