Bye Bye Bonus?
If you haven’t heard yet, 2022 is the last scheduled year of 100% bonus depreciation. From 2023 through 2027, bonus depreciation will phase down by 20% each year. Businesses have enjoyed the benefits of 100% bonus since 9/28/17 with the passage of the Tax Cuts and Jobs Act. Effectively, bonus depreciation has allowed businesses to write off equipment and certain building components in the year they are placed in service which has saved a tremendous amount of money from being paid in taxes for federal purposes. Many states do not conform to bonus depreciation.
This is especially important to consider for the transportation industry because other than brokerages, transportation is usually a very capital intensive industry. If Section 179 isn’t an option, bonus depreciation phasing down will likely increase taxable income significantly. Due to having 100% bonus for several years, many companies have little to no tax depreciation unless assets are purchased. On top of this, supply chains are still backed up so you may not be able to get equipment when you want it to take advantage of the higher bonus depreciation percentage.
There is some discussion of extending 100% bonus until the end of 2025 and then having it drop to 0%. Perhaps then it would be part of a tax extenders bill each year. With neither party having control of both the House and Senate after the mid-term elections, we do not expect major tax reform but rather smaller compromises such as this.
If you are in a situation of having an unusually high dollar amount of equipment being placed in service in 2022 compared to a normal year for your business, perhaps because the equipment didn’t come timely in 2021, consider electing out of bonus so there is tax depreciation available on these assets in future years. The purpose being to help offset the impact of the phaseout in 2023 and beyond, and smooth out the income. We hope to hear more on the potential extension of 100% bonus sooner rather than later to assist in making decisions such as this.
Nathan is a CPA and has more than ten years of experience providing tax planning, consulting and compliance services to a number of privately held businesses and individuals in a variety of industries, with a special focus on the transportation and logistics industry. He actively communicates with clients and seeks ways to align their individual and business goals with available tax strategies to allow them to make well-informed decisions.
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