2022 – Last Year for 100% Bonus Depreciation?

Since the 2017 Tax Cuts and Jobs Act, businesses have been allowed to write-off 100% of the cost of eligible property in the year the property is placed into service by using bonus depreciation. To qualify for bonus depreciation, the property placed into service must have a useful life of 20 years or less and be depreciated using the Modified Accelerated Cost Recovery System method. Property such as qualified improvement property, farm shops, car washes, computer software, vehicles, and equipment are all popular items that qualify for bonus depreciation.

There are many benefits to taking bonus depreciation. Unlike the Section 179 deduction, another method available for depreciating assets at an accelerated rate, bonus depreciation does not have a limitation on the maximum deduction. For tax years 2018-2022, the maximum bonus depreciation has been 100% of the cost of the qualified assets placed into service. For example, if a taxpayer buys (and places into service) a $100,000 qualified asset, they can take a $100,000 deduction in 2022. Bonus depreciation can also reduce income below zero, meaning it can create losses to offset other income and even create net operating losses. In contrast, Section 179 cannot be used to reduce business income below $0. As such, the maximum Section 179 deduction is limited to business income.

Another benefit to bonus depreciation is that it is an automatic deduction, meaning that the taxpayer receives it by default unless they opt out. If the taxpayer elects out of using bonus depreciation, they must do so for all property with the same useful life purchased in the year. For example, if a taxpayer buys two five-year assets and does not want to use bonus depreciation on one, they must elect out of using bonus depreciation on both, since both are five-year properties. This is one downside of bonus depreciation – it is not as flexible and easily tailored to the taxpayer’s needs. It is a one-size-fits-all approach to accelerated depreciation.

One downside to bonus depreciation is that the deduction rules are more volatile. The maximum deduction limit has changed drastically throughout recent years. Before the Tax Cuts and Jobs Act, the maximum bonus depreciation deduction was limited to 50% of the cost of qualified property. Then, from 2018-2022, it jumped to 100%. As it stands now, we are posed to lose the 100% bonus depreciation deduction starting in 2023, when the deduction will be reduced to 80% of qualifying expenses. After 2023, the deduction will continue to decrease by increments of 20% every year until it hits 0%, meaning no bonus depreciation allowed in 2027. The constant changes in the maximum deduction allowed on a year-by-year basis underscore the importance of using tax planning in the coming years.

Some states, such as MN, do not allow bonus depreciation, causing complex calculations on each return. Of course, in Wyoming and South Dakota we have no such hassle, as we don’t have an income tax.

Please reach out to your tax advisor at Ketel Thorstenson to discuss bonus depreciation and your specific tax situation.

March 21, 2023

Gifting – Is it Taxable?

We often get questions from our clients on gifting and its potential tax implications. A gift of money or property is not deductible on your personal income tax return nor does the recipient report the gift as income on their tax return. Gifts, however, may be subject to the federal gift tax. The gift tax is a tax on transfers of money or property to other people while getting nothing (or less than full value) in return.

Few people actually owe gift tax due to the annual gift tax exclusion and currently high lifetime exemption. For 2022, the annual gift tax exclusion was $16,000, and the exclusion will be raised to $17,000 for 2023. The exclusion amount is per recipient which means that a married couple can give a married child and spouse up to $68,000 in 2023 without reducing their lifetime estate exemption. Only gifts over the annual exclusion threshold must be reported on a gift tax return, Form 709.

A gift over the threshold amount simply uses a piece of your lifetime estate tax exemption. With the estate tax exemption at $12,920,000 per person in 2023, most taxpayers do not need to worry about paying estate and gift taxes. Keep your eye on the calendar though – beginning in 2026, the lifetime exemption is set to revert to 50% of current levels.

The general rule is that any gift is a taxable gift; however, there are many exceptions to this rule. Generally, the following are not considered taxable gifts:

  • Gifts that are not more than the annual exclusion.
  • Gifts consisting of direct payments to providers for medical and education expenses.
  • Gifts to your spouse.
  • Gifts to a political organization.

Since tax and gifting implications vary for each individual, please reach out to your tax advisor at Ketel Thorstenson to discuss your situation.

March 7, 2023