How Does the Reduction in Bonus Depreciation for 2023 Work?

[Bonnie Griffin Kaake]

Start by stopping the panic. Cost segregation was viable before Bonus Depreciation even existed. And, before 100% Bonus was available under the Tax Cuts and Jobs Act (TCJA) in 2017, the bonus had already dropped to 40%. So, what does it really mean when we say that Bonus is dropping to 80% in 2023 and by 20% more each year after? 

The 100% Bonus began with properties acquired and placed in service after September 17, 2017 and ends on December 31st, 2022. In 2023 it will drop to 80% which means that in a cost segregation study, 80% of all items that qualify for depreciation in 5, 7 and 15 years can be depreciated in the first year (just like the 100% Bonus did) and the next 20% can be accelerated to the appropriate category: 5, 7 or 15 years. That means those remaining items will be divided by 5, 7 or 15 years and each year you will take that portion in depreciation over and above your structural/capitalized depreciation. You are NOT losing it, you are simply going to take a little longer to depreciate the entire balance of what you can accelerate. You are still getting all of it. Keep in mind that the majority of what can be accelerated with bonus is usually in the 5 year category anyway. 

I hope that lets a few investors sleep better at night.