Upcoming Depreciation Tax Law Changes

Upcoming Depreciation Tax Law Changes

With tax season upon us, now is a great time to discuss depreciation tax law changes coming in the next few years and how this may impact your financial plan.

With tax season upon us, now is a great time to discuss depreciation tax law changes coming in the next few years and how this may impact your financial plan.

Specifically, let’s focus on Bonus Depreciation.

You may have heard the term before and not truly understood the meaning behind the phrase. Bonus depreciation allows businesses to immediately expense eligible assets in the first year of service instead of depreciating over a certain timespan.

This applies currently to assets placed in service after September 27, 2017 and before January 1, 2023. At that expiration date, if not renewed by Congress, then the bonus depreciation allowed will start to phase out over a 4 year timespan. For example, 2023 will lower to an 80% deduction, 60% in 2024 and 40% in 2025.

How Bonus Depreciation works in Real Estate

Bonus depreciation tends to be used primarily to offset income in business deals in their first year that utilize cost segregation studies and programs utilizing accelerated depreciation. For some, this is a key factor when determining how to financially plan investing in commercial real estate, like Excelsior has experience in. This may seem to negate a major benefit of such investments. It’s important to note that the idea of bonus depreciation was created to incentivize taxpayers to purchase these eligible assets and has come about and expired previously (2008 – 2013).

Preparing for Bonus Depreciation Phase Out

If Congress is not planning to inject cash into the economy to cover these benefits, there may be other tax incentives to come about that will offset this phase out process. This could be in the form of shorter depreciable life periods, a certain percentage of bonus reinstated for the foreseeable future, or tax credits for the amount spent on equipment. While each investor’s situation and goals are different, it will be important to keep up with any IRS pronouncements that may come out relating to this. It will also be a great tool to keep in mind when contemplating financial planning for the coming year and the best use of depreciation methods.

If you have any questions regarding bonus depreciation, or would like to speak with someone from our team, please don’t hesitate to reach out.

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A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

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