Bonus Depreciation – Assets Acquired after September 27, 2017

Since 2001, Taxpayers have had the ability to deduct a percentage of the acquisition costs of qualifying assets for their businesses as “Bonus Depreciation.” This provision in the tax code was intended to encourage a business to invest in new property and equipment and it was originally enacted as a temporary measure to stimulate the economy. Since the original enactment of the Bonus Depreciation provisions, Congress has periodically extended this provision, and at times Congress has modified the percentage that a taxpayer could claim as Bonus Depreciation.

Prior to the recently enacted Tax Cuts and Jobs Act (TCJA) (that was enacted into law on December 22, 2017), the Bonus Depreciation provision in effect for 2017 would allow a business to deduct 50% of the cost of newly acquired qualified assets. This Bonus Depreciation percentage was scheduled to drop to 40% for assets acquired in 2018, 30% for assets acquired in 2019, and then the Bonus Depreciation provision was scheduled to expire in 2020. However, the Tax Cuts and Jobs Act extended the ability to write off Bonus Depreciation through 2026 (or 2027 for certain assets), and it made other significant changes to the write off percentages and the types of assets that would now qualify for Bonus Depreciation. Moreover, this change to Bonus Depreciation was made retroactive to assets acquired after September 27, 2017. As a result, this provision will impact tax returns being filed for 2017 depending on the date the asset was acquired in 2017.

The new Bonus Depreciation provisions under TCJA will increase the Bonus Depreciation percentage to 100% for qualified property placed in service between September 28, 2017 and December 31, 2022 (or December 31, 2023 for certain property with longer life periods). Thereafter the Bonus Depreciation percentage will be reduced by 20% each year (80% for assets acquired in 2023, 60% for assets acquired in 2024, 40% for assets acquired in 2025 and 20% for assets acquired in 2026), until it is eliminated.

The second significant change to Bonus Depreciation under TCJA is that qualifying assets no longer must be new. Under the pre-TCJA provisions, to qualify for Bonus Depreciation a business had to acquire new property and could not claim Bonus Depreciation on newly-acquired used property. Previously, a newly manufactured piece of equipment acquired by the taxpayer would have qualified under pre-TCJA provisions, but if the taxpayer had acquired similar equipment that was previously used, the used equipment would not qualify for Bonus Depreciation treatment. Under the TCJA, used property will now qualify for Bonus Depreciation if the asset is newly acquired by the business and was not previously used by the taxpayer for any purpose.

Under the new rules there are several important changes to the types of assets qualifying for the 100% deduction and preparers are encouraged to review Part III – Cost Recovery and Accounting Methods, Section 13201, of the Tax Cuts and Jobs Act.