Last Chance For 100% Bonus Depreciation

Date November 30, 2022
Categories
Article Authors

The Tax Cuts and Jobs Act (TCJA) provided 100 percent bonus depreciation for qualified property (generally new and most used property with a tax recovery period of 20 years or less) placed in service after September 27, 2017, and before January 1, 2023. But the window is closing. If there is no reversal, the bonus percentage depreciation will begin dropping by 20 percent per year in 2023 until it zeros out in 2027.

Given the scheduled changes, taxpayers wanting to claim 100 percent bonus depreciation will need to acquire and place in service qualified property before the end of 2022. The “placed in service” date is when the property is ready and available for use, for most acquisitions, the purchase date. But qualifying can be more complicated, specifically for newly constructed or manufactured property, and property acquired but not used during the tax year. You should consult your tax advisor if you’re uncertain whether or not your property acquisition will be eligible for the bonus in 2022.

Should you acquire property before the end of 2022?

Accelerating tax deductions and deferring income is a common yearend tax planning technique, including acquiring property and claiming bonus depreciation. With the scheduled annual decline in bonus depreciation, the decision whether or not to acquire this year versus next presents itself with some sense of urgency. Should you rush to acquire property before the end of the year?

It depends. Lowering your tax bill should not be done at the expense of higher taxes over multiple future years; the best tax plans consider projected tax bills for years to come.

IRS Section 179

You should also consider whether IRS Section 179, another accelerated depreciation provision, will allow you to take an immediate deduction. Section 179 will not expire at the end of 2022; you can continue to use its expensing option for acquired property in the future. That said, Section 179 rules can make for very different outcomes than bonus depreciation at both federal and state levels. Your tax advisor should consider, and advise you, on the availability of Section 179 before you decide whether or not to acquire property before the end of the year.

The benefits of bonus depreciation will begin shrinking with each coming New Year, but the decision to acquire property this year or next depends on many factors. Consult with your tax advisor and consider your tax multi-year tax liability as well as the opportunity to use Section 179 before buying.

We can help. For more information, please reach out to your HBK Tax Advisor.

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Watch: Manufacturing Solutions: Tax Planning for Manufacturers

Date November 23, 2020
Categories
Article Authors
HBK CPAs & Consultants

As the end of 2020 nears, manufacturers should begin thinking about their taxes. Join Jim Dascenzo, CPA and Peter Roupas, CPA, JD to discuss tax planning strategies specific to manufacturing companies. Key opportunities discussed will include:
  • Research and Development (R&D) tax credit
  • Bonus Depreciation
  • IC-DISC
  • LIFO Inventory Valuation
  • Accrual vs. Cash Basis
  Download the materials.

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IRS Issues Regulations Favorable to Dealers

Date September 16, 2019
Categories

On Friday, September 13, 2019 the IRS issued proposed regulations that clarify bonus depreciation and interest expense for dealerships with floor plan financing. To the extent that overall interest expense, including floorplan interest, is below 30% of adjusted taxable income, a dealership will be eligible to take 100% bonus depreciation. Further, eligibility to take bonus depreciation is determined on an annual basis. Therefore, even if a dealership has to use the floor plan exception one year in order to deduct all of its interest expense (thereby losing the ability to take bonus depreciation in that year), it may still be eligible to take bonus depreciation in subsequent years if overall interest expense falls below 30% of adjusted taxable income in that given year. This is great news for dealers who may have thought that bonus depreciation was lost forever.

When issued, the Tax Cuts and Jobs Act of 2017 ushered in the most comprehensive and sweeping tax reform since The Tax Reform Act of 1986. Among the many changes that resulted was an interest expense limitation equal to 30% of adjusted taxable income. Another notable outcome was the increase to bonus depreciation. Prior to the 2017 act, bonus depreciation was to drop to 40% of the cost basis of the asset. The 2017 act increased the rate to 100% for assets placed in service from September 27, 2017 to December 31, 2022.

What was the impact of these changes on dealerships? Rex Collins, HBK CPAs & Consultants (HBK) Dealership Industry Group Principal, had an audience with the House Ways and Means Committee during the development of the bill proposals. As a result of his testimony, the House version of the bill included language that allowed dealerships with floor plan financing to deduct all floor plan related interest expense, even if that expense ultimately exceeded 30% of adjusted taxable income. However, dealerships would also not be able to benefit from 100% bonus expensing. Originally, the law as passed was interpreted as allowing a full deduction of floor plan interest while excluding a dealership from 100% bonus depreciation.

Subsequently, the Joint Committee on Taxation issued a Blue Book interpretation of the interaction between floor plan interest expense and bonus depreciation that was much more favorable to dealerships. Essentially, it suggested that if interest expense including floor plan interest was less than 30% of adjusted taxable income, the dealership may be eligible for bonus depreciation expensing. However, the interpretation also held that once a dealership used the floor plan exception, the dealership would not be eligible to use bonus depreciation in subsequent years.

Friday’s announcement by the IRS of the new final and proposed regulations clarifies the conflicting language in the act and the Blue Book interpretation and is welcomed good news for dealers with floor plan financing.

Contact the HBK Dealership Industry Group today to discuss planning opportunities related to bonus depreciation as well as many other items that impact your dealership.

Rex Collins is a Principal at HBK CPAs & Consultants. He directs HBK’s Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com, or by phone at 317-504-7900.

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