Bonus Depreciation

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Qualified Improvement Property (QIP) is eligible for bonus depreciation.

QIP refers to any improvement made by a taxpayer to an interior portion of an existing building that is nonresidential real property.

Examples of qualifying improvements include

Excluded from the definition are improvements attributable to internal structural framework, enlargements to the building, and elevators or escalators.

The CARES Act has made a retroactive fix to the Tax Cuts and Jobs Act to make QIP eligible for bonus depreciation.

This means that under current law, for qualified property, acquired and placed in service between September 28, 2017, and December 31, 2022, the TCJA increases the first-year bonus depreciation percentage to 100%.

After 2023, bonus depreciation will still be available for both new and used qualified property, but the percentages will be reduced as follows:

  • 80% for property placed in service in calendar-year 2023,
  • 60% for property placed in service in calendar-year 2024,
  • 40% for property placed in service in calendar-year 2025, and
  • 20% for property placed in service in calendar-year 2026.

How does this work?

Let’s just assume that Abc Co was going to depreciate the $100k over a 39-year period and they were going to say that the scrap value or salvage value of the lights at the end of the 39 years is $0.

So if the scrap value or salvage value of the lights at the end of the 39 years is $0 then, ($100k – $0) / 39 years = $2,564 per year of deprecation.

(Things to note: Depreciation is an expense and thus reduces company profits in the year the depreciation occurs, not in the year the money was necessarily spent.)

The average United States effective corporate tax rate is 27.1%

  • The standard 39-year $2,564 deduction would amount to $694 in tax savings in 2020.
  • A bonus $100k deduction in 2020 would then qualify for a 2020 tax savings of $27,100 dollars.
  • That is significant!

Would you rather have $27k today or $694 per year for the next 39 years?