Changes to Depreciation Coming in 2023
We’re all currently knee-deep in 2022 year-end taxes right now, but there are two changes to keep in mind as you’re doing 2023 quarterly estimates – bonus depreciation phase out and PA’s new Section 179 rules.
Bonus depreciation phase out
First off, what is bonus depreciation?
Bonus depreciation is a tax deduction that allows businesses to write off the cost of certain assets in the current year, instead of capitalizing and taking the deduction over 5 years or more. Currently you can take 100% bonus depreciation on assets that have less than a 20-year useful life, meaning you can write off the entire cost of the asset in year 1. This excludes residential and commercial property. This is obviously a very large tax savings for many taxpayers.
The Tax Cuts and Jobs Act of 2017, however, begins to phase out bonus depreciation starting in 2023 by dropping the maximum amount to 80%. The deduction then phases out over the next four years: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Unless Congress extends it, bonus depreciation will no longer be available after 2026.
For taxpayers who are accustomed to taking large amounts of bonus depreciation each year to reduce their tax liability, the next couple of years could be an unpleasant surprise. It’s something taxpayers should be keeping in the back of their minds when considering cash flow over the next couple of years. Something else to consider would be accelerating purchases into years with bonus depreciation still enacted, if it makes sense from a business perspective.
Pennsylvania Section 179 Depreciation
What is section 179 depreciation?
Similar to bonus depreciation, Section 179 depreciation allows a taxpayer to deduct the entire cost of the asset in the first year it’s placed in service. While there are no restrictions on the amount or income limits for taking bonus depreciation, there are some limits for Section 179 depreciation. For 2022, the maximum section 179 expense deduction is $1,080,000, with that limit being reduced when the cost of Section 179 property placed in service during the year exceeds $2.7 million. Taxpayers also must be in an income position to claim bonus depreciation in the current year, i.e. it can’t be used to create a net operating loss.
For personal income tax in Pennsylvania, prior to 2023, Section 179 depreciation was capped at $25k. However, starting in 2023, Pennsylvania will follow the federal rules ($1,160,000 when adjusted for inflation). This is huge for taxpayers with the majority of their activity in Pennsylvania and something to be considered when looking at 2023 quarterly estimates.
Please contact us if you have questions about the information outlined above, our seasoned and experienced tax professionals are here to help. You can also learn more about our Tax services by visiting our website.