Leverage TCJA Bonus Depreciation Before It’s Gone

The Tax Cuts and Jobs Act (TCJA) originally offered a generous 100% bonus depreciation allowance for qualifying assets acquired and placed in service between September 27, 2017, and January 1, 2023. However, the program is now winding down. The allowance has already decreased to 80% and will continue phasing out until 2027.

Real estate business owners planning major purchases may want to factor the declining bonus depreciation schedule into their decisions. Consulting a qualified tax professional can help determine the optimal timing for new investments to maximize allowable deductions before they expire. 

While the full 100% allowance window has closed, bonus depreciation phase-out provisions remain effective through 2026. Reviewing upcoming capital expenditure needs in light of the current tax code could help identify any cost-saving opportunities relevant to your business situation. 

Which properties qualify for TCJA bonus depreciation?

The main IRS rules for claiming bonus depreciation are:

1. A qualified non-residential property such as retail centers, hospitals, hotels, and motels.
2. Qualifying improvements to the property, such as replacing HVAC, flooring, plumbing, or lighting.
3.  Assets placed in service during the eligible timeframe. 

Let’s look at an example:

Say you purchased a hotel in 2022 and are currently upgrading the HVAC system and replacing the flooring. These renovation costs would be considered a qualified improvement property (QIP) for bonus depreciation. To receive the maximum 80% bonus depreciation deduction, you must place the hotel in service with all upgrades completed by December 31, 2023. 

You can capture the 2023 bonus depreciation rate of 80% for the HVAC and flooring improvements. 

However, if unforeseen delays push the renovation finish date to early 2024, those assets would only receive 60% bonus depreciation based on the decreased 2024 rate. 

TCJA phase-out schedule

Here is the phase-out schedule through the remaining length of the program:

• 2023: 80% bonus depreciation
• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation
• 2026: 20% bonus depreciation
• 2027: No bonus depreciation (fully phased out) 

How to maximize bonus depreciation

Strategic timing and preparation are key to optimizing this tax benefit before it expires.

Don't miss critical annual deadlines

To maximize bonus depreciation, it is critical to have assets operational and placed in service by December 31st. Missing this yearly deadline results in a lower bonus depreciation rate the following year due to the phase-out schedule.

For example, completing renovations or improvements by December 31, 2023 will allow you to qualify for the 80% bonus depreciation rate available that tax year. However, if the assets are not in service until 2024, you will only be eligible for the lower 60% rate. 

This concept applies each subsequent year as the bonus depreciation percentage progressively decreases — completing projects in January will mean losing out on the higher rate from the previous December. Even a one-month delay into the new year can mean significant tax savings lost.

Combine with cost segregation to maximize benefits

Consider cost segregation studies, which break down a building's components into different asset classes with shorter recovery periods that qualify for bonus depreciation when placed in service. Conducted by accountants, engineers, and construction experts, these studies allocate costs to specific building parts, allowing faster depreciation and maximizing tax savings.

Maximize TCJA bonus depreciation before phase-out

Real estate businesses should act now to maximize bonus depreciation, strategically timing renovations and purchases before the program ends. Work with tax advisors to leverage cost segregation and optimize deductions for each year’s allowable rate.

Each year, the fixed phase-out schedule decreases the bonus depreciation rate, diminishing potential tax savings. Consulting with experts proactively helps you maximize benefits at the highest rates still available.