7896 / What temporary bonus depreciation rules can be used in connection with an equipment leasing arrangement?

Editor’s Note: The 2017 tax reform legislation generally allows a 100 percent bonus depreciation for business owners with respect to property that is placed in service after September 27, 2017 and before January 1, 2023. Further, under the 2017 tax reform legislation, the requirement that the property be originally placed into service by the taxpayer is removed (i.e., tax reform permits accelerated expensing of used assets, see Q ).¹

In TRA 2010, Congress provided for 100 percent bonus depreciation (i.e., expensing the full cost) for qualified property placed in service after September 8, 2010, and before 2012.² (ARTA 2012 extended the placed-in-service date through 2013 for a subset of qualified property that will continue to be eligible for 100 percent bonus depreciation: certain property with a longer recovery period, transportation property, and certain aircraft.)³ For other qualifying property placed in service after 2007 and before September 27, 2017, the bonus allowance is 50 percent (i.e., one half of the cost of the property can be deducted in the year the property is placed in service), and the rest of the cost is recovered using the otherwise applicable cost recovery method.⁴ In the latter case, the actual deduction in the first year will thus exceed 50 percent of the property’s cost: the allowance will include not only the bonus depreciation but also the appropriate percentage of the rest of the cost of the property.

The 2017 tax reform legislation once again changed the bonus depreciation rules. The bonus depreciation provisions will be phased out based upon the date the property was placed in service, as follows: |

• Property placed in service after September 27, 2017 and before January 1, 2023: 100 percent expensing.
• Property placed in service after December 31, 2022 and before January 1, 2024: 80 percent expensing.
• Property placed in service after December 31, 2023 and before January 1, 2025: 60 percent expensing.
• Property placed in service after December 31, 2024 and before January 1, 2026: 40 percent expensing.
• Property placed in service after December 31, 2025 and before January 1, 2027: 20 percent expensing.
• 2027 and thereafter: 0 percent expensing.⁵

In the case of qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer after September 27, 2017, different rules apply. If the property was placed in service before January 1, 2018, 50 percent expensing applies. If the property was placed in service in 2018, 40 percent expensing applies. If the property was placed in service in 2019, 30 percent expensing applies, and if the property was placed in service after 2019, 0 percent expensing is permitted.⁶