Bonus depreciation of 100 percent ends on December 31, 2022. This is sad news for business owners. . Then, starting in 2023, lawmakers scheduled bonus depreciation to decline by 20 percent each year. It will be reduced to 80 percent in 2023 and will decline 20 percent each succeeding year through 2027 when it will be zero.
This means that if a business owner purchases $100,000 of qualifying equipment for the business and places it in service in 2022, he may still deduct $100,000 in 2022 using 100 percent bonus depreciation. If he waits until 2023, bonus depreciation will only deliver an 80 percent deduction.
Comparing IRC Section 179 Expensing to Bonus Depreciation
Bonus depreciation and IRC Section 179 expensing both allow business owners to deduct in one year the cost of most types of tangible personal property. Both methods can be used to deduct
- new and used property you purchase and
- improvements to commercial buildings after they are purchased as long as the improvements are not structural in nature
Section 179 can be applied to qualifying property up to the annual limit then bonus depreciation can be claimed for any remaining basis.
As mentioned above, bonus depreciation will be less than 100 percent starting in 2023. Any basis left after applying bonus depreciation and Section 179 is deducted with regular MACRS depreciation over several years.
There are, however, some significant differences between bonus depreciation and Section 179 expensing.
Section 179 Has An Annual Limit
The annual dollar limit for Section 179 is subject to is the most important difference between bonus depreciation and Section 179 expensing. In 2018, the Tax Cuts and Jobs Act has doubled the limit to $1 million. With adjustments for inflation, the limit is $1,080,000 for 2022, and is estimated to be $1,160,000 in 2023.
Since Section 179 is intended to help smaller businesses, there is also a limit on the total amount of Section 179 property a business can purchase each year when claiming the deduction.
The available Section 179 deduction must be reduced by one dollar for every dollar by which the annual purchases exceed the applicable limit. For 2022, the limit is $2,700,000.
For 2023, the Section 179 limit is estimated to be $2,890,000. This amount is large enough that most small businesses will not be affected by it. There is no dollar limit on bonus depreciation.
Section 179 Expensing Can’t Create a Loss
Section 179 expense can only bring your taxable income to zero; you may not use it to create a loss. If your 179 expenses are not fulling utilized you can carry them forward to future tax years until fully utilized.
Create A Loss with Bonus Depreciation
Since bonus depreciation is unlimited in amount, it may result in a business loss. This business loss otherwise known as a Net Operating Loss (NOL) can be carried forward to future years until fully utilized similar to the treatment of excess 179 expenses.
Keeping your 179 Deduction – the 50 Percent Rule
Business owners must use their qualifying Section 179 property more than 50 percent for business to qualify for Section 179 expensing. If the business use of the property falls below 50% during the property’s recovery period, business owners must give back some or all of the Section 179 deduction through a process called “recapture.”
For bonus depreciation, there is no 50 percent business-use requirement for most business property.
Class-Wide Bonus Depreciation
When bonus depreciation is used, it must be used for all assets that fall within the same class. Individual assets may not be picked and chosen.
When Section 179 expensing is used, it does not apply class-wide. This is a potential advantage because business owners may pick and choose which assets he wishes to deduct using Section 179 within the same asset class.
Any four-wheeled vehicle that is manufactured primarily for use on public streets, roads, and highways, and that is rated at 6,000 pounds unloaded gross vehicle weight (GVWR) or less is considered a passenger automobile.
For passenger automobiles, bonus depreciation is limited to $8,000 no matter how much they cost. This limit will not change in 2023 so there is no point in purchasing a defined passenger automobile in 2022 instead of 2023 to take advantage of bonus depreciation.
Other Heavy Vehicles and SUVs
The 100 percent bonus depreciation may be used on trucks, vans, SUVs, and crossover vehicles with a GVWR of 6,001 pounds or more. It may also be used on cars with a curb weight of 6,001 pounds or more.
In 2022, the Section 179 deduction is limited to $27,000 for trucks, vans, SUVs, and crossover vehicles with a GVWR or 6,001 to 14,000 pounds. This $27,000 limit does not apply to pickup trucks with a bed of at least six feet or to vans that seat more than nine passengers behind the driver.
The Section 179 deduction does nothing for cars because it replaces depreciation. There is no additional benefit.
Take note that business owners can still use 100 percent bonus depreciation in 2022. This drops to 80 percent in 2023, so to get the maximum deduction, there is a need to combine Section 179 expensing, bonus depreciation, and MACRS depreciation.
Real Property and Land Improvements
Most types of Section 1250 property, including land improvements, do not qualify for the Section 179 deduction. Section 179 expensing may be used to deduct interior improvements to non-residential real property.
In comparison, bonus depreciation may be used to deduct land improvements with a 15-year class life. Improvements may include sidewalks, fences, driveways, landscaping, and swimming pools.
When to Use 100 Percent Bonus Depreciation in 2022
To take advantage of 100 percent bonus depreciation, there are a few situations where it may be advisable to purchase and place property in service by the end of 2022.
- If the business needs to purchase more than $3,780,000 of property, it will not be able to use Section 179 expensing. But if the property is placed in service in 2022, 100 percent bonus depreciation may be used
- If the business needs to purchase more than $1,080,000 in property in 2022, its Section 179 deduction will be exhausted and bonus depreciation will be used for purchases over $1,080,000.
- If there is a need to purchase land improvements, these cannot be deducted using Section 179. Purchasing them in 2022 will allow for deductions using bonus depreciation.
- If there is a need to purchase a business-use SUV that weighs between 6,001 and 14,000 pounds. The deductions will be larger if the vehicle is purchased in 2022 instead of 2023 since bonus depreciation will go down to 80 percent.
Remember that it is not enough to purchase the property by December 31, 2022. In order to claim bonus depreciation or Section 179 expensing, the property must be placed in service in the business by year-end.