By Dan Furman
For the past two decades, lawn and landscape companies of all sizes have typically used Bonus Depreciation, a prolific part of the tax code, to “write off” large ticket purchases such as trailers, skid steers, etc. For several years, it has been set at 100% of an item’s purchase price, thanks to 2017’s Tax Cut and Jobs Act. But written into that same act was a phase-out of the program, which begins this year (2023).
Starting in the 2023 tax year, Bonus Depreciation falls to 80% of the purchase price, then 60% in 2024, 40% in 2025, and finally 20% in 2026. At this writing, 2027 will have no Bonus Depreciation. This phase-out can affect how and when companies make purchases.
The following article will explain what Bonus Depreciation is, how it’s different from Section 179 (which it’s often associated with) and most importantly, strategies companies can employ to help offset the effects of this phase-out.
Bonus Depreciation Explained
Bonus Depreciation first became part of the US Tax Code in 2002. Essentially it allowed companies to accelerate the depreciation schedule on purchased equipment – in other words, instead of depreciating a purchased item a little each year, Bonus Depreciation allowed for a much larger chunk to be depreciated in year one and written off on taxes. Since 2017, it has been set at 100%, meaning companies could write off the entire purchase price of equipment.
You might be saying “this sounds like Section 179.” And you would be correct to a point, especially since Bonus Depreciation is almost always mentioned alongside Section 179. But it is its own part of the Tax Code.
Differences Between Bonus Depreciation and Section 179
Since Bonus Depreciation and Section 179 both allow the full purchase price of equipment as a write off in the current year, they are thought to be one in the same. But there are several important differences, as follows:
The Spending and Deduction Limits are Different. Section 179 has limits on both the total amount that can be written off, as well as how much a business can spend. For 2023, Section 179 allows a $1,160,000 total deduction, with a $2,890,000 cap on equipment spend before the deduction begins to disappear on a dollar-for-dollar basis.
Conversely, Bonus Depreciation has no limits on deduction amount or equipment spend. This makes it a popular choice for companies once Section 179’s spending limits are reached or exceeded.
Qualifying Equipment. Virtually all types of new and used tangible equipment a company will buy qualify for both Section 179 and Bonus Depreciation. This also includes some software. One key difference is Section 179 is valid on certain capital improvements (such as fire and security systems, HVAC, Roofs, etc.), where Bonus Depreciation is not.
Another difference is Bonus Depreciation can only be used on equipment that has less than a than a 20-year expected life on the MACRS depreciation schedule. However that’s not much of a limitation, as this includes just about anything a business would buy.
How They Are Used. Section 179 is very flexible, allowing a business to pick and choose which items they will declare. Bonus Depreciation does not have this flexibility – if a company chooses to use it, every purchased asset in the same MACRS depreciation class will be included in the deduction.
Put another way, say a company purchases six mowers in 2023 and all of them are listed on the same five-year depreciation schedule (a very common timeframe). If they use Section 179, they can claim three of them this year, and save the other three for yearly depreciation. But if they choose to use Bonus Depreciation instead, they do not have this choice – all six must be declared, which leaves no depreciation for future years.
Profitability (and Losses). Section 179 is a “profit-only” tax deduction. It’s deducted from taxable income only, and is not available if the company posts a loss for the year. Further, a loss cannot be created by using Section 179.
Bonus Depreciation can be deployed regardless of profitability. In addition, Bonus Depreciation can be used to create a loss. This is a large distinction, and a popular reason why companies sometimes choose Bonus Depreciation over Section 179.
How Does the Bonus Depreciation Phase Out Affect Your Company?
Obviously, if you were planning to use Bonus Deprecation in 2023, it will affect you because it’s now 80% instead of 100%. However, many companies leave depreciation to the accountants, so they may not be aware of exactly what type of depreciation schedule or deduction the accountant uses. In this case, a call to your accountant regarding the 2023 phase out makes sense.
There are several options for affected companies. The first option is to simply stay the course and accept the 80%, which is still a robust deduction. I always suggest getting tax deduction purchases as early in the year as possible, due to supply chain issues perhaps delaying them. Rates are expected to keep rising this year too, making this doubly viable.
This decision gets more involved for the future however. If you were planning on a large 2024/2025 purchase and planned to use Bonus Depreciation, bumping it to 2023 might make sense. Then you can claim 80% instead of 2024’s 60%.
Lastly, if your company is expected to be profitable in 2023, you can simply elect to forgo Bonus Deprecation and use Section 179 instead (assuming the Section 179 limits won’t be reached.)
The 2023 Bonus Depreciation phase out will undoubtably affect companies who have come to rely on it to pay less tax. But there are viable strategies to mitigate the potential dollars lost in the phase out. Whether it’s moving planned purchases to 2023 or using Section 179 as an alternative, companies should plan ahead and take advantage of whatever tax deductions are available to them.
Furman is the Vice President of Strategy at Crest Capital, which provides small and mid-sized companies financing for new and used equipment, vehicles, and software, as well as offering equipment sellers a simple and risk-free financing program. Visit them online at www.crestcapital.com.
All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates. These views are also opinion – always speak to your accountant or tax professional before engaging in any financial contract or tax matter.