The Sunsetting of Bonus Depreciations: Implications Post Tax Cuts and Jobs Acts

The Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, brought significant changes to the U.S. tax code, including a temporary expansion of bonus depreciation. This tax incentive allowed businesses to deduct a substantial portion of the cost of qualifying assets immediately, stimulating capital investment and economic growth. However, the TCJA included provisions for the gradual phase-out or sunset of bonus depreciation, which has important implications for businesses as they plan their tax strategies in the coming years. It is particularly important for Real Estate Operators who syndicate deals, and rely on Bonus Depreciation to support their financial model and projected returns to investors.

Understanding Bonus Depreciation
Bonus depreciation is a tax policy designed to incentivize businesses to invest in capital assets. It allows companies to accelerate the depreciation of qualified assets, deducting a substantial portion of the asset's cost in the year it is placed in service. This provides businesses with immediate tax benefits, reducing their taxable income and overall tax liability.

The TCJA temporarily enhanced bonus depreciation by allowing businesses to deduct 100% of the cost of qualified assets acquired and placed in service between September 27, 2017, and December 31, 2022. This was a significant departure from previous tax law, where bonus depreciation was limited to 50% or less.

The Sunset Provision
While the TCJA provided an immediate boost to bonus depreciation, it also contained a sunset provision that would gradually reduce the benefit over time. Starting in 2023, the bonus depreciation rate is set to gradually decrease as follows:
2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027 and beyond: No bonus depreciation

Implications for Businesses
Reduced Tax Benefits: The gradual reduction of bonus depreciation means that businesses will no longer be able to deduct 100% of the cost of qualifying assets in the year they are acquired. This will lead to increased taxable income and potentially higher tax liabilities.

Impact on Capital Investment: The phase-out of bonus depreciation may have implications for business investment decisions. Companies that were relying on the immediate tax benefits of bonus depreciation to support capital expenditures may need to reassess their investment strategies.

Tax Planning Considerations: Businesses will need to adjust their tax planning strategies to account for the decreasing bonus depreciation rates. This may involve spreading the tax benefits over several years or exploring alternative tax incentives and credits.

Industry-Specific Effects: Certain industries, such as manufacturing and technology, which rely heavily on capital investments, may be more affected by the reduction in bonus depreciation. Businesses in these sectors may need to carefully evaluate the financial impact and adjust their budgets accordingly.

Potential Legislative Changes: It's worth noting that tax policy is subject to change through legislation. As the sunset of bonus depreciation approaches, there may be efforts to extend or modify the provision.

Staying informed about legislative developments is crucial for businesses planning their tax strategies.

Conclusion
The sunsetting of bonus depreciation from the Tax Cuts and Jobs Act introduces new challenges and  considerations for businesses as they navigate changing tax incentives. While the immediate benefits of 100%
bonus depreciation will gradually diminish, it's essential for businesses to adapt their tax planning and investment strategies accordingly. This may involve spreading out deductions over multiple years or exploring other tax incentives to support capital investment.

Additionally, keeping a close eye on potential legislative changes is crucial, as tax policy is subject to revision and can impact businesses' bottom lines.

Effective tax planning and consultation with tax professionals will be essential for businesses to optimize their tax strategies post-TCJA bonus depreciation.