An article by Thomas Oriet - Of-Counsel Attorney for the Law Offices of Casey D. Conklin
When the 2017 Tax Cuts and Jobs Act was enacted, Internal Revenue Code 168(k)(1)(A) was amended to increase the bonus depreciation rate for the first year when the qualified property was “placed in service” for a business. The rate increase was from 50% to 100%, meaning a business could deduct 100% of the costs for the newly-acquired qualified property if it’s placed into service in 2022, instead of depreciating the costs over a set number of years.
The bonus depreciation phaseout begins in 2023 at a reduction of 20% per year until the bonus is 0% in 2027; therefore, the benefits of 100% bonus depreciation ends this year. It’s hard to believe that we’re approaching five years since this Act has applied.
Let us briefly consider two other major requirements: placed in service and qualified property. Generally, “Property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income … .” Thus, purchasing property and using it in a small business would qualify the “placed in service” requirement.
Next is a question that has no simple answer: what is “qualified property?” Qualified property includes depreciable property with a recovery period of 20 years or less, computer software, water utility property, and a few other classifications. Still, what is 3-year, 7-year, or 20-year property? We can reference IRC 168(e), 1245, and 1250), but this will require someone to review IRS Publication 946 and other guidance to connect the specific property placed into service with the IRS-recognized recovery period category. For instance, a building heating system and lighting fixtures are structural components, while sidewalks and drainage facilities to the commercial property are land improvements. They all may be affixed to the real property, but each classification affects the property’s eligibility for bonus depreciation. After the classifications are determined, another question is the property acquisition requirements. Qualified property could include new or bought-used property since the taxpayer did not use that property in her business prior to the new or secondhand purchase.
There are far more prerequisites and considerations to discuss about depreciation that is beyond the scope of this short article. At the moment, the 100% bonus depreciation is approaching the sunset, which may influence business plans for new ventures or developments.
Thomas Oriet, Esq, LLM, EA, is an Of-Counsel attorney specializing in asset protection, estate planning, and agricultural law at the Law Offices of Casey D. Conklin.
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[** The information in this article is not legal advice or tax advice, and this article must only be used for educational purposes. Please consult with an attorney before making any decision. This article cannot be used or relied upon for purposes of avoiding tax penalties. The author will not be updating the article due to changes in the law.]
 Dependent on the property’s recovery period classification.  IRC 168(k)(6)(A). For aircrafts and longer production period property, the phaseout begins in 2024, the qualification requirements are extensive. (IRC 168(k)(2)(B) & (C) have the definitions and IRC 168(k)(6)(B) have the phaseout outlines.)  Treas Reg 1.167(a)-11(e)(i); Proposed Regulation 1.168-2(l)(2) (49 Fed. Reg. 5956). See also Treas Reg. 1.179-4(e).  IRC 168(k)(2)(A)(i)  For illustrative purposes, Treas Reg. 1.167(a)-11(e)(i).