Nothing is set in stone, but the latest draft of the tax bill being fashioned in Washington includes a return to 100% bonus depreciation in 2025, which has enjoyed bipartisan support in the past. Let’s take a look at what that means for businesses going forward.
What is Bonus Depreciation?
Bonus depreciation is a tax deduction that accounts for the diminishing value of a tangible asset over its lifetime. For example, a vehicle that costs $30,000 at purchase declines in value over time until, at 10 years of age, it tends not to be worth much of anything.
Using an ordinary straight-line depreciation, the business that owns the vehicle, uses it at least 50% of the time for business and depreciates it over five years would be allowed to reduce its value by $6,000 annually.
Under the more common Modified Accelerated Cost Recovery System (MACRS), businesses may front-load the depreciation according to IRS percentage tables guide. It might be reduced 20% the first year ($6,000) and 32% the second year ($9,600).
What is New with Bonus Depreciation?
In the past, businesses have been able to deduct the full depreciation in year one, boosting cash flow and eliminating seepage in value due to the time value of money. That changed with the tax bill passed in 2017, which began phasing out bonus depreciation starting in 2022 in order to reduce the law’s impact on the deficit. Bonus depreciation declined to 80% in 2023, 60% last year 2024, and was scheduled to drop to 40% this year before disappearing in 2027.
Under the current tax bill draft, which is expected to survive the legislative process, any property placed in service between January 20, 2025 and December 31, 2029 would be eligible for 100% depreciation in the first year. This formula has widespread support within the business sector and with policy makers because it spurs investment.
How Certain is the Return of 100% Bonus Depreciation?
That said, and despite the President’s stated support for 100% bonus depreciation retroactive to January, both houses of Congress will need to balance various priorities in the bill along with increased debt spending during the budget reconciliation process and win majority support for passage of a bill that includes this provision. Return of 100% depreciation has enjoyed the support of lawmakers since the original change was made eight years ago, yet has failed to win passage.
The sunsetting provision of the bill gives it the illusion of a smaller impact on debt, but it is widely expected it will be reinstated around the time it expires. This, of course, is exactly what happened with the previous law, necessitating the current change.
What Does 100% Bonus Depreciation Mean for Our Business?
When a depreciated asset is disposed of, whether by sale, trade, retirement or some other way, the depreciation is generally recaptured, resulting in additional taxable income. Even if the full amount is recaptured, this is a win for business, which kept the $30,000 upfront and paid it back five years later. What business wouldn’t like a five-year loan at 0%? With 3% annual inflation, the $30,000 recaptured is worth only $25,878 five years later.
What does it mean for your business if 100% bonus depreciation is restored? National Tax Group recommends to its clients that they prepare to invest in tangible assets essential to profit-making over the next five years rather than wait until after, when IRS depreciation rules are once again uncertain. This applies to equipment, vehicles, real estate, software and more.
Bonus depreciation’s cousin, the Section 179 deduction, is more advantageous to some businesses, if they are profitable and depreciating used equipment. But there is a limit on the 179 deduction ($1.25 million) and it does not cover real property. The two methods may be used together, with the 179 taking priority.
How should you approach the prospect of 100% bonus depreciation and its relationship to the 179 deduction? By talking with your tax advisor and mapping out the best plan for you.
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