The House passed the Tax Relief for American Families and Workers Act at the end of January, and the bill now awaits Senate passage. It offers several potential benefits for business-owner clients plus an expanded child tax credit.
Even if the bill continues to stall in the Senate, these popular tax breaks are likely to come under discussion again. It's important for advisors to keep abreast of the legislation — and related considerations — to be ready to advise clients as appropriate.
100% Bonus Depreciation
Bonus depreciation is an additional amount of first-year depreciation that businesses can take on the purchase of qualifying business equipment. The Tax Cuts and Jobs Act of 2017 expanded the types of equipment on which this additional depreciation can be taken to include not only new equipment but some used equipment as well.
Equipment purchases placed in service between Sept. 27, 2017, and Jan. 1, 2023, were eligible for 100% bonus depreciation. Beginning in 2023, the amount of bonus depreciation decreases by 20% each year until it phases out totally beginning in 2027.
The legislation pending before the Senate would restore 100% bonus depreciation through the end of 2025.
The ability to immediately write off the cost of qualifying property can provide significant upfront tax savings and can help business owners afford to purchase the equipment and other assets to grow their businesses. For financial advisors, qualifying property that could pertain to the business includes computer systems and related items under this legislation or under Section 179 rules.
Section 179 Deduction
Under Section 179, businesses may deduct the entire cost of certain qualifying purchases in the year that they were bought rather than recover the cost through depreciation. Qualifying property includes depreciable tangible personal property, machinery, office furniture, certain computer software and qualified real property as long as it is purchased solely for use in an active business. Improvements to owned or leased business property such as a roof, heating and cooling systems and installing a security system can also qualify.
The limit for the section 179 deduction for 2024 is $1.22 million, with a phaseout on the amount that can be deducted beginning at $3.05 million of total eligible equipment purchased during the year.
The proposed legislation would increase the amount of the deduction to $1.29 million beginning in 2024 with the phaseout increased to $3.22 million. These amounts would be increased for inflation for tax years after 2024.
Section 179 and Bonus Depreciation: Using Them Together
A point to discuss with some clients is how the Section 179 deduction and the bonus depreciation rules can be used together to maximize expensing certain business purchases.
Generally, Internal Revenue Service rules require that businesses apply the Section 179 deductions first, with the bonus depreciation rules coming into play once the Section 179 deductions have been fully used.
R&D Expensing
Under current tax rules, research and development expenses incurred in tax years after Dec. 21, 2021, must be amortized over a five-year period.
The proposed legislation would delay the rule on amortizing domestic R&D expenses to tax years after Dec. 31, 2025. R&D expenses incurred relative to business activities outside the United States would continue to be amortized.
