Bonus Depreciation: The Implications of Upcoming Percentage Reductions

Jonathan Schiffer – 1/3/2024

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought enormous changes to the U.S. tax code, with the aim of stimulating economic growth and simplifying the tax system. One of its provisions was bonus depreciation, a tax benefit designed to incentivize business & real estate investment by allowing the deduction of a larger portion of the cost of qualified assets in the year they are placed in service. However, the annual reduction of bonus depreciation from 80% to 60% in 2024, diminishing 20% yearly for the next few years has raised concerns among real estate investors. This article delves into the issues surrounding the annual reduction of bonus depreciation in the context of real estate investments, focusing on assets like car washes and gas stations.

Breaking down Bonus Depreciation

Bonus depreciation allows investors to claim an additional deduction in the first year of purchasing qualified assets like car washes and gas stations. Under the TCJA, businesses could immediately deduct 100% of the cost of qualified property acquired and placed in service after September 27, 2017. Now standing at 60%, this significant upfront deduction provides a significant tax advantage and acts as a catalyst for investments, especially in capital-intensive real estate.

Upcoming Annual Reduction of Bonus Depreciation

While the immediate expensing of assets was designed to spur economic activity, the TCJA introduced a gradual reduction in the bonus depreciation percentages. As discussed, starting in 2023, the bonus depreciation percentage began to decrease by 20% annually, until it reaches 0% in 2027 and beyond. This gradual reduction was included in the legislation as a way to curb the long-term tax revenue losses from the immediate expensing provision.

Impact on Real Estate Investing

Real estate investments like car washes and gas stations are machine-intensive assets that rely heavily on capital expenditures. These assets require significant expenditure on infrastructure, equipment, and property improvements to operate at their highest capacity. Bonus depreciation provides a valuable opportunity for owners of these properties to accelerate deductions and mitigate tax liabilities, making it an attractive incentive for investors.

However, this reduction means that the tax benefits associated with bonus depreciation will diminish over time, raising concerns for real estate investors. The decreasing percentages should add to investor’s urgency in order to take full advantage of bonus depreciation in its earlier stages.

Conclusion:

The Tax Cuts and Jobs Act’s (TCJA) bonus depreciation provision is a tool that encourages investment and boosts economic activity, particularly within capital-intensive industries like real estate. However, the annual reduction of 20% in bonus depreciation percentages presents challenges for future investment decisions in sectors such as car washes and gas stations. There’s no time like the present, and 2024 seems like a proper time to strike for real estate that takes advantage of bonus depreciation.

RealSource Group has represented some of the nation’s largest developers, operators, owners, & institutional clients in the sales of their express car washes & gas station/c-stores. We currently have numerous bonus depreciation qualifying assets on and off-market. Don’t hesitate to reach out to us at RealSource Group to learn more.

Disclaimer: This article is for informational purposes only and should not be considered as financial, tax, or legal advice. It is recommended to consult with professionals to determine the suitability of any investment strategy or transaction.

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