As part of the phased changes introduced by the 2017 Tax Cuts and Jobs Act (TCJA), the rules for 100% bonus depreciation are evolving. These updates present opportunities and challenges for businesses to optimize their tax strategies. Here’s what you need to know and how Sequoia Investments can support your planning.

What Is Bonus Depreciation?

Bonus depreciation, also known as additional first-year depreciation, was introduced following September 11, 2001, to encourage business investment. This tax incentive allows a percentage of the cost of eligible assets to be deducted upfront in the first year. Historically, the allowable deduction has ranged from 30% to 100% of the depreciable basis.

Businesses must claim bonus depreciation unless they actively elect out of it by filing a statement with Form 4562. Elections are made annually for each class of property, which includes assets with recovery periods of 3, 5, 7, 10, 15, or 20 years.

What Qualifies as Bonus-Eligible Property?

Property typically qualifies for bonus depreciation if it meets one of the following criteria:

• Tangible Assets: MACRS property with a recovery period of 20 years or less.
• Software: Computer software depreciated under Code Sec. 167(f)(1).
• Utilities: Water utility property under Code Sec. 168(e)(5).
• Media Productions: Qualified film, television, or live theatrical productions under Code Sec. 181(d).

Key Changes to Bonus Depreciation (Code Sec. 168(k))

Starting January 1, 2023, bonus depreciation rates are declining annually:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and beyond: 0%

Implications for Businesses in 2024

1. System Adjustments:
   Businesses must ensure their accounting and ERP systems can accommodate the phased reduction in bonus depreciation. Tax and IT teams will need to collaborate to maintain compliance and accurate reporting.
2. Section 179 Expensing:
   With bonus depreciation no longer at 100%, Section 179 expensing regains importance. This option allows businesses to selectively deduct the full cost of certain assets in the year they’re placed in service, though it’s subject to limitations.
3. State Tax Impacts:
   Not all states align with federal bonus depreciation rules. Companies must monitor state-level legislation and evaluate how it affects both bonus and Section 179 deductions.
4. Repairs and Immediate Expensing:
   Under 100% bonus depreciation, some repair costs may have been overlooked. With reduced rates, identifying expenses that qualify as immediate repairs can enhance tax efficiency.

Navigating Tax Changes with Sequoia Investments

Staying informed and proactive is critical as these bonus depreciation changes unfold. Contact us today to explore strategies tailored to your organization and maximize the tax benefits available in 2024.