In 2023, Congress was unable to address some important tax policies that are important to many small business owners. They hope to address Bonus Depreciation in early 2024. This most favored of tax breaks by the small business owner is scheduled to decrease in 2023 from 100% to 80% and then decrease in 20% increments each year thereafter. However, many lawmakers believe that bonus depreciation is the one tax item that will be addressed in 2023 and restored back to 100%, given the current economic conditions.

Bonus depreciation allows businesses to write-off half the cost of new capital investments immediately instead of deducting them over time as normal depreciation rules dictate.

The Build It In America Act provides that 100% bonus depreciation would remain for qualified property placed in service before January 1, 2026. Under current law passed under TCJA, there is a reduction of bonus depreciation to 80% in 2023 and a decrease of 20% each year until it is no longer available starting in the 2027 taxable year.

More specifically, qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft), as well as specified plants planted or grafted after September 27, 2017, and before January 1, 2023, are eligible for 100-percent bonus depreciation. The 100-percent allowance is phased down by 20 percent per calendar year for qualified property acquired after September 27, 2017, and placed in service after December 31, 2022 (after December 31, 2023, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after December 31, 2022.

The provision extends 100-percent bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026 (January 1, 2027, for longer production period property and certain aircraft) and for specified plants planted or grafted after December 31, 2022, and before January 1, 2026. The provision retains 20-percent bonus depreciation for property placed in service after December 31, 2025, and before January 1, 2027 (after December 31, 2026, and before January 1, 2028, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after December 31, 2025, and before January 1, 2027.  

Bonus depreciation is an important tax savings tools for businesses as it allows them to take an immediate deduction in the first year on the cost of eligible business property. This lowers a company’s tax liability because it reduces their taxable income. This accelerated depreciation method means a company may pay substantially fewer taxes in the tax year in which they claim bonus depreciation. While bonus depreciation and Section 179 are both immediate expense deductions, bonus depreciation allows taxpayers to deduct a percentage of an asset’s cost upfront; whereas, Section 179 allows taxpayers to deduct a set dollar amount. There are additional notable differences.

AGAINST

"Research shows that it is of limited effectiveness as stimulus. Studies have shown that bonus depreciation “is largely ineffective as a policy tool for economic stimulus,” according to the Congressional Research Service (CRS). 

"Making it permanent would sacrifice whatever modest boost it can provide in future recessions. Whatever modest stimulus bonus depreciation may provide stems entirely from its temporary nature. If it is permanent — or if repeated short-term extensions lead firms to expect it will be routinely extended — it will no longer encourage them to accelerate their purchases during economic downturns, as they will get the same tax break regardless of whether the purchases occur when the economy is weak or when it’s strong.

"Making bonus depreciation permanent is very expensive. Extending it permanently and expanding it, as the House has twice voted this year to do, would cost $276 billion over the coming decade (2015-2024), according to the Joint Committee on Taxation (JCT). The cost would be roughly the same over ten years if Congress repeatedly extended bonus depreciation for one or two years at a time so that it never expired instead of formally making it permanent.

"Companies already receive generous tax treatment when they invest in equipment. Under current law, companies pay far less than the statutory 35 percent corporate tax rate on the profits flowing from those investments. In some cases, they receive a tax subsidy for those investments. Bonus depreciation further increases this favorable tax treatment." -- Center on Budget and Policy Priorities

Should Congress extend 100% Bonus Depreciation through December 31, 2025?