Bonus Depreciation is Being Phased Out In 2023
Bonus depreciation is a tax incentive that allows businesses to take a deduction upfront instead of over time. It started in 2002 after the 9/11 terrorist attacks with a 50% up front deduction as an attempt to stimulate the economy. Between 2017 - 2022, bonus depreciation doubled and businesses were able to deduct 100% of eligible assets.
When is Bonus Depreciation Over?
100% Bonus depreciation ended in 2022. Following 2022, bonus depreciation will decrease by 20% every year until 2027 when it’s finally down to 0%.
Here’s the schedule:
- 2023 - 80%
- 2024 - 60%
- 2025 - 40%
- 2026 - 20%
- 2027 - No longer available
What Type of Assets Are Eligible in Construction?
Any kind of equipment used in construction is eligible for depreciation. Some examples include:
- Business vehicles
- Heavy equipment
- Building improvements
Equipment written off has to have a less than 20 year lifespan, but virtually all equipment in construction meets that criteria.
Bonus Depreciation vs Depreciation
What’s the difference between bonus depreciation and depreciation? Both bonus depreciation and depreciation are methods to write costs of assets off. Depreciation refers to gradually deducting the cost from net earnings over the useful life of the asset. Bonus depreciation allows the company to take the deduction in the first year of purchasing the asset. To keep it simple:
- Bonus depreciation - takes the deduction the same year of purchasing
- Depreciation - takes the deduction gradually
Is Bonus Depreciation Being Phased Out?
Yes! As of now, 2023, bonus depreciation is on it’s way out. It currently sits at 80% reduction and will reduce by 20% every year until 2027 when it reaches 0%.
If you have any questions about construction bookkeeping, accounting, best practices or want to join our construction bookkeeping community, check out our resources and original content at ConstructionBookkeeping.com
The Bottom Line. "Bonus Depreciation Explained: What is Bonus Depreciation and How Does it Work?" YouTube, uploaded by The Bottom Line, 25 Sept. 2019, https://www.youtube.com/watch?v=2d-V0SVa4WA.
"Bonus Depreciation." Thomson Reuters Tax & Accounting, Thomson Reuters, https://tax.thomsonreuters.com/en/glossary/bonus-depreciation.
Kagan, Julia. "Bonus Depreciation." Investopedia, 15 Jan. 2022, https://www.investopedia.com/terms/b/bonusdepreciation.asp.