Hey everyone, I’m Bette Hochberger, CPA, CGMA. Today I want to discuss some recent news. The Tax Cuts and Jobs Act (TCJA) of 2017 announced a significant shift in the U.S. tax landscape, introducing a range of new measures aimed at stimulating economic growth. Among these was the 100% bonus depreciation, a provision allowing taxpayers to immediately deduct the full cost of eligible assets. As we draw close to the end of 2022, this pivotal tax benefit is poised to begin its phase-out, a change that warrants attention from businesses and individual taxpayers alike.
The Sunset of 100% Bonus Depreciation
Initially, the TCJA’s bonus depreciation rules were set to expire at the end of 2019. However, in a move to further encourage investment, these rules were not only extended but also enhanced, offering a 100% deduction for qualified assets placed in service after September 27, 2017, and before January 1, 2023.
This unprecedented allowance has been a boon for many businesses, enabling them to accelerate deductions and improve cash flow. But as this window closes, a new phase of tax planning begins.
Depreciation Phase-Out Schedule
The phase-out of the 100% bonus depreciation is structured over the next few years. Starting in 2023, the deductible amount for qualifying property will drop to 80%. Thereafter, we will see a 20% reduction each subsequent year. This gradual decline leads to the eventual elimination of this benefit, fundamentally altering the tax planning landscape for many businesses.
Implications for Tax Planning
The reduced bonus depreciation rate necessitates a reevaluation of asset acquisition strategies. Businesses must now weigh the benefits of accelerating purchases to capitalize on the higher rate against other financial considerations.
This phase-out also impacts future budgeting and cash flow projections, as the tax relief provided by the immediate deduction diminishes. Therefore, revisiting financial and tax strategies is imperative for companies to remain quick and efficient in their operations.
Opportunities and Challenges
Despite the challenges posed by the phase-out, there remain significant opportunities. Companies can leverage this transition period to reassess their asset management strategies, potentially reaping benefits from both the tail end of the 100% depreciation and the incoming lower rates.
Additionally, this is a great time to explore other tax incentives and credits that might serve as effective alternatives to the dwindling bonus depreciation.
So, as we approach this crucial juncture, the phase-out of the 100% bonus depreciation under the TCJA signifies a major shift for taxpayers. The changing landscape demands careful consideration and strategic planning to optimize tax positions.
Staying ahead of these changes and seeking professional guidance will be key in navigating this transition smoothly, ensuring that businesses and individuals alike continue to thrive in an evolving tax environment.
I hope you learned something new today. As always, stay safe, and I will see you next time.