Fixed Asset Expensing Rules Changing for Businesses
If you are in business and have invested in fixed assets for use in your business in recent years, you likely have gotten used to the generous immediate expensing rules that have been available to most small and medium-sized businesses. It wasn't unusual under these rules for a business to be able to deduct up to 100% of the cost of newly acquired fixed assets in the year they were placed in service under what is commonly referred to as bonus depreciation.
It's hard for me to believe, but the investment incentive known as bonus depreciation dates back a couple of decades. It was first enacted by Congress in 2002 as a temporary deduction to encourage businesses to invest and, in turn, stimulate the economy following the 9/11 terrorist attacks. But "temporary" tax law provisions have a way of sticking around, and bonus depreciation was no different.
Bonus depreciation accelerates depreciation by allowing businesses to write off a large percentage of the eligible asset's cost in the first year it was purchased. The remaining cost, if any, can then be deducted over multiple years using regular tax depreciation methods until the cost is fully deducted.
For a time, only new property qualified for bonus deprecation, but eventually eligibility was expanded to used fixed assets so long as they were not previously owned by the taxpayer taking the deduction.
With the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, major changes to the rules were made. Most significantly, it enacted 100% bonus depreciation, allowing businesses to immediately write off 100% of the cost of eligible property acquired and placed in service after September 27, 2017, and before January 1, 2023. Prior to TCJA, it was merely a 50% immediate deduction.
The big change here now is the expiration date referred to above for the 100% deduction. As things stand now, the percentage of bonus depreciation allowed is scheduled to be phased out as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
This is a major change coming down the pike. As you might imagine, for a deduction as popular as this has become, there is a call for Congress to repeal the phase-out or at least freeze it at some level, but as yet, the political realities are such that any efforts to get this to a vote have been without fruit. Therefore, it is important to plan as if this phaseout will stick.
All is not lost, however, as the also popular (and non-expiring) Section 179 deduction for business is still available. Much like bonus depreciation, Section 179 creates a path for immediate expensing of fixed asset costs, albeit with more restrictions as to who may take it and with a limit on how much can be deducted.
On a side note, many states have their own depreciation laws that are not necessarily tied to the federal law. This often results in large differences between the amount of federal and state depreciation allowed on their respective tax returns.
Arkansas, for example, didn't adopt the federal bonus depreciation rules and for years allowed a maximum Section 179 deduction of only $25,000. However, beginning in 2022, Arkansas expanded its own Section 179 deduction, resulting in the Arkansas Section 179 deduction being raised from a maximum of $25,000 per year to $1,080,000 per year.
