Before the Tax Cuts and Jobs Act ("TCJA"), both short-lived and long-term assets were allowed only a partial deduction. Before the TCJA, businesses were not allowed to fully expense the cost of certain investments and assets resulting in higher tax liability. These costs were permitted to be depreciated in accordance with a depreciable schedule set by the IRS such as over 7 years or 15 years. For example, if a business purchases $20,000 of computer equipment in any tax season; the cost is partially deductible in the year of purchase, and the remainder is depreciated over the life of these assets (5-year life of computer equipment).

Under TCJA, the 100% bonus depreciation allows the taxpayer to fully expense the entire $20,000 in the year the equipment was purchased. The TCJA incentivizes investment and economic growth by providing full immediate expensing rather than stretching the expensing with prolonged depreciation deductions.

The delayed depreciation also fails to account for the value of money over a period of time. The delayed depreciation results in businesses losing part of their cost invested in equipment/assets as money fails to maintain its value against inflation. The net result of prolonged depreciation of assets is a failure of the business to fully recover its cost which leads to higher tax liability because the profits are overstated.

The 100% bonus depreciation in the immediate year of the expense will be phased out by 20 point increments starting in 2023. Unless Congress makes this provision a permanent part of the tax code, businesses will be forced to forego part of their recovery.

If you are either starting a business or an existing business planning asset acquisition or investment, contact attorney Inderraj Singh for tax strategies and planning to save in taxes and increase your profits. For a free consultation, call (661) 599-8884 or send us an email at [email protected]. You can also schedule an appointment by visiting: calendly.com/thesinghlawoffice.

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