To incentivize businesses to purchase machinery, vehicles, and other assets, congress set up bonus depreciation with the Tax Cuts and Jobs Act of 2017. This allowed businesses to fully write off the eligible property in the year they put the asset into service. This began in 2017 and will last through 2026. Beginning in 2023 the percent that can be written off drops by 20% each year. Qualified property is a property that has a useful life of 20 years or less (most assets except buildings), improvements made to nonresidential real property (as long as they are made after the building is open for business), computer software, and listed property (property used for both business and personal reasons) which is used more than 50% for business.
Recently, the IRS implemented proposed regulations to bonus depreciation as follows:
Definition of Qualified Used Property – The IRS eliminated the “original use” requirement so taxpayers can now take bonus depreciation on used assets they acquire. To determine if the property is used, it must be determined if the taxpayer or predecessor had a depreciable interest in the property and whether or not they were claiming depreciation on it, prior to the current taxpayer acquiring it. The new rules say only the five calendar years prior to the year the current taxpayer places the asset in service can be reviewed to determine this. And if the taxpayer or predecessor has been in business for less than five years, then only those years are considered.
Expanded Component Election – Taxpayers can claim bonus depreciation on components of larger construction projects. The new regulations allow bonus depreciation to be claimed even if the contract to make the property was not a binding one. Also, the construction completion date requirement was removed.
Qualified Improvement Property – Originally, the TCJA classified qualified improvement property as nonresidential real property, meaning the depreciable life would have been 39–year and did not qualify for bonus depreciation. However, the updated regulations changed it to be 15–year property. This makes the property eligible for bonus depreciation, but only if the improvement was made by the taxpayer and for the taxpayer.
If you want more information on depreciation or need help with tax preparation, contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.