When 2024 arrives, you will be filing your tax returns for 2023. It’s always a reflection of what occurred. At that point, not much can be done to account for a tax surprise. And we know there is no such thing as a good tax surprise.
That’s why we advocate year-round tax planning. If you plan, you can account for changes before the opportunity to address the changes passes by, making tax season much less spooky.
For business owners, let’s look at a big change that became effective in 2023 and will continue to become a bigger consideration for the next few years.
Bonus Depreciation: If you’ve been deducting 100% of your business’ purchase cost of a large asset in a single year, significantly reducing your tax liability for the year, the phase-out for this bonus depreciation begins this year. So now only 80% of that asset can be depreciated in a single year. And that percentage will drop by 20 each year until it’s completely phased out by 2027. Let’s dive into this concept a little further.
Asset depreciation, according to the IRS, “is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.”
In layman’s terms, the monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
Bonus depreciation, on the other hand, offers businesses an accelerated method of claiming the value of the asset. Instead of spreading out the depreciation of a significant asset over its entire useful life, you can deduct a substantial portion of its purchase cost within a single fiscal year.
The origins of the bonus depreciation tax incentive can be traced back to Congress in 2002, following the aftermath of the 9/11 events. This policy aimed to stimulate large purchases by businesses by allowing a deduction of 50% of the cost of a qualified asset in a single tax year.
However, in 2017, Congress introduced a game-changing development in the form of the Tax Cuts and Jobs Act (TCJA). This legislative overhaul brought about a significant shift in bonus depreciation rules. Under the TCJA, businesses had the opportunity to write off the entire cost (100%) of eligible assets placed in service after September 27, 2017, and before January 1, 2023.
Now, with the passing of the January 1, 2023 deadline, the era of 100% bonus depreciation has expired. Consequently, businesses need to be mindful of the onset of the bonus depreciation phase-out.
If you are wondering if you should consider the bonus depreciation while it’s still available at 80% in 2023, the answer is….well, it depends!
Some businesses benefit by taking the full deduction of an eligible asset to substantially reduce their taxable income, thereby reducing their tax liability. However, if you have a startup company and maybe anticipate more sales in 2024, then it may be wise to postpone that depreciation until next year when your revenue is higher.
There is still another option, Section 179, which allows businesses to deduct software, equipment, and vehicle expenses as one sum in a tax year, rather than depreciating those assets over several years. However, Section 179 has to be claimed in the year the asset was put into service.
Wondering what’s coming in 2024? So are we! Once Congress gets back to legislating, which in and of itself can be spooky, we will have more insight into business deductions for the coming year.
Still spooked about this year? Give us a call. Saunders Tax & Accounting is open Monday through Thursday from 9 am to 5 pm and is available online at www.SaundersTax.com. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year”, we have been providing a Less Taxing Life and More Prosperous Solutions since 1984!