Tax Planning Considerations with the New Bonus Depreciation

[Julio Gonzalez]

As I’m sure many of you are aware of, bonus depreciation began its phase-out this year. Bonus depreciation has been a key element in the tax planning strategies for many businesses which allowed for a large portion of the cost related to bonus depreciation eligible assets to be deducted in the year that they were placed into service. This helped to reduce tax liability and increase the cash flow.

Bonus depreciation was originally introduced in 2002 as part of the Job Create and Worker Assistance Act and has undergone many revisions and extensions since then. The biggest turning point for bonus depreciation was in 2017 as part of the Tax Cuts and Jobs Act bonus depreciation was expanded to additional assets and those qualified assets could be 100% depreciated. This caused many businesses to invest in new assets.

However, this was never intended to be a permanent piece of our tax regulations and has begun the phase-out with 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and being completed phased out starting in 2027. This changes the tax planning landscape for many businesses. Those who relied on bonus depreciation now need to reassess the tax strategies and look for new tax savings avenues.

Many real estate owners utilize cost segregation studies as part of their tax planning strategy. A study could result in immediate tax savings, lower insurance costs, and improved cash flow. The phase-out of bonus depreciation is likely to influence cost segregation studies considerably. When the bonus depreciation percentage decreases, the immediate tax savings will likely decrease as well. This may impact investors' cash flow and bottom line, especially those who have relied heavily on this tax strategy. However, this is now a good time for investors to rethink their investment strategies and make necessary adjustments.

There are tax code changes every year. In the H.R. 3936, Built in America Act, it was proposed to extend the 100% bonus depreciation until January 1, 2027. This has the potential to be passed later this year. While the phase-out of bonus depreciation will undeniably alter the tax landscape, it does not nullify the benefits of cost segregation. It will continue to be a valuable tool for real estate investors to accelerate depreciation deductions but must be considered within a new context.

Here are a few suggestions on strategic tax planning in the new era:

• Explore other tax incentives: The phase-out of bonus depreciation narrows one avenue for tax savings, but other tax incentives are still available such as Section 179, historic tax credits, 1031 exchange, opportunity zones, etc.
• Seek professional advice: The bonus depreciation phase-out adds another layer of complexity to navigating tax law. Businesses are encouraged to seek professional advice to fully understand these changes and to develop effective tax strategies.
• Revisit asset management strategies: Businesses may need to reconsider the timing of asset purchases and disposals, the classification of assets and the potential for asset revaluations.
• Be proactive in tax planning: Get a cost benefit analysis performed on your properties or potential purchases to have a plan of depreciation and how those write-offs will carry over each year.

What questions do you have regarding the phase out of bonus depreciation?