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Bonus Depreciation Phase Out

Since September 27, 2017, taxpayers have been able to deduct 100% bonus depreciation for the cost of qualified assets rather than having to write the costs off (depreciate) over a number of years, depending on the type of asset. In other words, in most cases taxpayers could deduct the full cost of most equipment in the year of acquisition, rather than a fraction of the cost over a number of years. Effective January 1, 2023, this provision is schedule to gradually phase out (20% per year) through the end of 2026, as follows:

It is important to note that Section 179 Depreciation will still be available, and in many, but not all cases will still create the same tax benefit. For example, in tax years beginning in 2022, the maximum section 179 expense deduction is $1,080,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,700,000. It is important to note that there are some differences and limitation when using section 179 depreciation vs. bonus depreciation. For example, section 179 is limited to net income, so it cannot be used to create a loss, while bonus deprecation can. Also, note that the limitations also apply on assets depreciated on pass-through entities such as S Corporations and Partnerships, as the Section 179 limits also apply again on the individual level. While this may seem complicated, it is an important factor to consider if one is an S corporation shareholder or partnership and receive a form K-1 from pass-through entities.

Additionally, not all states allow the use of bonus and/or section 179 depreciation. For example, in Pennsylvania, bonus depreciation is not allowed, so a PA taxpayer does not receive the benefit of bonus depreciation on their State tax return. In contrast, Pennsylvania C corporations receive the full benefit of Section 179 depreciation. PA S Corporations, Partnerships, and Individuals, including sole proprietors are limited to $25,000 Section 179 depreciation each year. Also, note that in PA, losses for S Corps., Partnerships and Individuals are generally not deductible against other classes of income and do not carryover to future years, so it may sometimes be beneficial to be less aggressive in claiming bonus depreciation, unless the Federal benefit outweighs the future loss of the deduction for State purposes.

Please note that the rules in many states do not conform to Federal rules, so determining which method to use needs to be made on State-by-State basis and careful planning and strategy is required.

Posted: November 2022

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Blue Bell, PA 19422
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