Derek M. Paddock, CPA, MSA
Tax Manager

The Tax Cuts and Jobs Act (TCJA) of 2017 ushered in numerous tax incentives that were embraced by the business community. But it also contained expiration dates for many of those incentives, and those expirations are starting to detonate now during the 2023 tax year. 

Derek M. Paddock

One of the most significant business-friendly tax incentives to expire this year is 100% bonus depreciation, which enabled companies to immediately recoup the full cost of equipment purchases. As 100% bonus depreciation expires, this tax incentive drops to 80% for equipment put into service during the 2023 tax year and will further decline another 20 percentage points each year until 2027, when it is phased out entirely.

Business owners who had a binding contract to receive new equipment by December 31, 2022, but didn’t receive it due to supply chain shortages may still be able to get the benefit of 100% bonus depreciation. But those who put off equipment purchases during the pandemic and missed the 2022 cutoff may want to accelerate purchases into 2023 to take advantage of 80% bonus depreciation before it, too, is gone.

A second significant change in tax incentives that impact businesses will be the increase in the allowable limit and phaseout level for Section 179 expensing. For the 2023 tax year, the maximum allowable expensing for certain qualifying business property will be $1.16 million, and the amount at which it begins to phase out will be when the Section 179 property exceeds $2.89 million in value, both figures representing an approximately 7% increase from 2022 levels.

Change in tax strategies

Taken together, these changes will compel business owners and their advisors to consider new tax strategies to determine the most tax efficient approach to incentives that are available to help businesses upgrade their operations.

In previous years, accelerating large equipment expenditures into the current year to take advantage of tax benefits made sense. However, the supply chain challenges that have plagued nearly all industries for the past two years made it impossible to plan on placing new equipment in service before a certain date, unless it was ordered very early in the year. That means now is the best time to purchase equipment for the best shot at placing it in service in 2023.

It’s important to remember that equipment placed in service after December 31, 2022, may still qualify for 80% bonus depreciation. The portion that cannot be immediately deducted can still be depreciated on a normal five-year schedule.

Coordinating with state tax provisions

Coordinating tax strategy around bonus depreciation and Section 179 is complicated by state tax laws, which increasingly have decoupled from the federal approach in recent years. For states, allowing such generous tax benefits as 100% bonus depreciation makes too large a dent in tax revenues.

New England states in particular do not conform to federal bonus depreciation, with different rules for each state. Massachusetts, for example, disallows bonus depreciation entirely while Connecticut disallows bonus depreciation in the year taken, but allows a deduction at 25% each year over the four succeeding years. The result of this nonconformity is a timing difference affecting when taxpayers may take depreciation expense deductions for federal and state tax purposes.

As a result, coordination of tax strategy between federal and state taxes becomes complicated, especially for companies that do business in multiple states.

Now is the time to plan

For most businesses, now is the time to sit down with your advisor to discuss any new equipment purchases that you plan to place into service in 2023 and evaluate the best tax strategy, particularly if there is a chance that the equipment may not arrive on time.

For more information about tax planning around major equipment purchases, contact your GT Reilly tax advisor.