Strategic Considerations for Construction Contractors

The Tax Cuts and Jobs Act of 2017 ushered in full 100% Bonus Depreciation expensing for qualified property acquired and placed in service in years beginning after September 27, 2017. This tax perk has proven to be a significant benefit for the construction industry. However, all of this is scheduled to end by 2027 unless Congress acts.

Phase-Out Schedule

2023 – 80% of cost basis

2024 – 60% of cost basis

2025 – 40% of cost basis

2026 – 20% of cost basis

By 2027 the bonus depreciation benefit is zero!

Since relying on Congress can be a risky proposition, here are some possible strategies to consider:

  • Consider whether Section 179 expensing can pick up the slack. 
    • Although Bonus Depreciation and Section 179 expensing are often confused with each other, they are very different provisions.
      • Section 179 is limited in the amount that can be expensed. For 2023, the maximum Section 179 expense limit is $1,160,000 and the maximum limit on property placed in service before phaseout is $2,890,000. There is also a Section 179 taxable income requirement.
      • Bonus Depreciation does not have these limitations. However, with Section 179, taxpayers can “cherry-pick” which assets they want to expense, which is not permissible under Bonus Depreciation rules.
  • Continue to take just Bonus Depreciation since even the phase-out percentages are beneficial.
    • An 80% cost deduction is still a very attractive tax benefit. So is 60%. Therefore, you may opt to continue with taking Bonus Depreciation on the qualified assets placed in service in 2023 and beyond.
  • Using a combination of Section 179 and Bonus Depreciation.
    • Under the tax law, Section 179 is considered first, and then Bonus Depreciation. Ketel Thorstenson can assist you in analyzing an optimal combination. Like most tax planning strategies, we have to model the scenarios before determining the optimal combination of Section 179 and Bonus Depreciation expensing.
  • Consider equipment leasing as an alternative.
    • Especially in the later years of the Bonus Depreciation phase-out periods, equipment leasing may be the most beneficial strategy for some companies.
  • Accelerate asset acquisitions to 2023.
    • In general, if you are planning to place a significant amount of assets in service in the next few years, you should consider accelerating them into 2023 since the 80% rate is applicable.

Feel free to contact Ketel Thorstenson if you would like to discuss these or any other alternatives.  Hopefully, Congress reverts back to 100% Bonus Depreciation expensing. But as I noted before, don’t count on it!