The Clock is Ticking: How the Phase-Out of Bonus Depreciation Could Affect Your Business
Picture this: You’re speeding down a highway, enjoying the fast lane, and suddenly, you see a sign that says, “Reduced Speed Ahead.” That’s exactly what’s happening with bonus depreciation — a financial fast lane that’s about to slow down. For years, businesses have enjoyed the benefit of writing off 100% of qualified assets immediately, but that’s changing. And if you’re not prepared, you might hit a financial speed bump.
In this article, we’ll break down the phase-out timeline, how it could impact your business, and strategies to stay ahead of the curve. Buckle up!
📉 What is Bonus Depreciation and Why Has It Been So Popular?
If you’ve been using bonus depreciation, you know it’s been a game-changer. Introduced under the Tax Cuts and Jobs Act (TCJA) in 2017, it allowed businesses to deduct 100% of the cost of qualifying property in the year it was placed in service. This meant companies could free up capital and reinvest in growth immediately, rather than spreading deductions out over several years.
Why it mattered:
Immediate tax savings
Boosted cash flow for reinvestment
Encouraged business expansion and equipment upgrades
But, as they say, all good things must come to an end.
⏳ The Phase-Out Timeline: What’s Happening and When?
Here’s where the slowdown begins. Starting in 2023, bonus depreciation started phasing out incrementally. The 100% deduction has already dropped, and by 2027, it’s completely gone. Here’s the timeline:
2023: 80% bonus depreciation
2024: 60% bonus depreciation
2025: 40% bonus depreciation
2026: 20% bonus depreciation
2027: 0% — No more bonus depreciation
If you’re eyeing large purchases like machinery, vehicles, or software, time is running out to lock in those higher deductions.
🏢 Industries That Will Feel the Biggest Impact
Not all industries are affected equally by this phase-out. Sectors that rely heavily on capital investments are in the hot seat.
Top industries affected include:
Manufacturing: Heavy equipment and machinery purchases will cost more without immediate tax breaks.
Construction: Equipment and vehicles will face longer depreciation periods, tightening margins.
Technology & Software: Companies investing in servers and tech infrastructure could see delayed ROI.
💡 Pro Tip: If you’re in one of these industries, consider accelerating capital expenditures before the percentage drops further.
💸 How This Could Impact Your Business’s Bottom Line
Let’s talk dollars and sense. Losing bonus depreciation means businesses will have to spread deductions over several years instead of taking them upfront. This could result in:
Reduced cash flow: Less immediate liquidity to reinvest in growth
Higher taxable income: Without large deductions, taxable income rises
Delayed ROI: Capital investments may take longer to pay off
📊 Stat Alert: According to the Tax Foundation, businesses utilizing bonus depreciation saw a 16% average reduction in their effective tax rate. Without it, many companies may face steeper tax bills.
📅 Timing is Everything: Should You Accelerate Asset Purchases?
If you’re considering a major equipment purchase or technology upgrade, now’s the time to act. With the phase-out in motion, locking in a higher percentage deduction while you still can is a smart move.
When to buy:
Aim to place assets in service by December 31, 2024, to claim the 60% deduction.
If you’re planning for 2025 or later, weigh the long-term financial impact of waiting.
💡 Pro Tip: Consult with your CPA to map out your asset acquisition strategy before it’s too late.
🧠 Alternative Tax Strategies to Consider
As bonus depreciation fades out, savvy business owners should explore other tax-saving avenues. Here’s a shortlist:
Section 179 Expensing: Still allows immediate write-offs, but with lower limits.
Cost Segregation Studies: Accelerate depreciation for real estate assets.
Qualified Improvement Property (QIP): Eligible for shorter depreciation periods.
🎯 Expert Insight: Tax strategist Tom Wheelwright suggests, “When one door closes, another opens. Smart business owners pivot to other strategies that can offset tax liabilities.”
📝 Final Thoughts: Stay Ahead of the Curve
The phase-out of bonus depreciation may feel like a red light, but with the right strategy, you can keep your business cruising smoothly. Take advantage of higher deductions while they last, explore alternative tax strategies, and ensure your business remains financially agile.
Remember: The best time to act is now. Waiting until the phase-out reaches 0% could cost your business thousands. As Warren Buffet famously said, “Predicting rain doesn’t count. Building arks does.” So, start building your financial ark today!
