Tax Bulletin: Year-End Planning By Councilor, Buchanan & Mitchell, P.C. CPAs & Business Advisors Depreciation — Capital Asset Purchases Capital investments have long been a useful way to reduce income taxes, and the Tax Cuts and Jobs Act (TCJA) further enhanced this technique by expanding bonus depreciation. For qualified property purchased after Sept. 27, 2017, and before Jan. 1, 2023, businesses were able to deduct 100% of the cost of new and used (subject to certain conditions) qualified property in the first year that the property is placed into service. In 2023, the amount of the bonus depreciation began to decrease by 20% each year (80% bonus depreciation allowed for 2023, 60% allowed for 2024). Absent Congressional action, the deduction will be eliminated in 2027. Special rules apply to property with a longer production period. Qualified property includes computer systems, purchased software, vehicles, machinery, equipment, office furniture, land improvements and qualified improvement property (QIP). QIP includes most interior improvements (non-structural). Effective Jan. 1, 2022 under the TCJA, Section 163(j) business interest expense limitation calculation no longer allows for an add-back for depreciation, amortization and depletion to a company’s adjusted taxable income calculation. If a dealership has its business interest expense limited when including floorplan financing interest expense in the calculation, it is not eligible to take bonus depreciation in that tax year. The full amount of the floorplan financing interest expense will be deductible. Additionally, under the TCJA, Section 179 expensing (deducting the entire cost) is available for computer systems, purchased software, vehicles, machinery, equipment and office furniture, as well as several improvements to nonresidential real property, including QIP, roofs, HVAC and fire and security systems. Beginning Jan. 1, 2023, the maximum deduction is limited to the amount of income from the business activity or $1.16 million. The allowed deduction begins phasing out when the amount of eligible property placed in service exceeds $2.89 million. Beginning Jan. 1, 2024, the maximum deduction and phase-out amount will be $1,220,000 and $3,050,000, respectively. Credits Electric Vehicle Charging Equipment Credit For businesses that install new EV charging equipment after Dec. 31, 2022, the maximum credit is the lesser of 30% of the total cost or $100,000 per unit. However, there are new restrictions on eligibility, including that the charging equipment must be installed in lowincome communities or non-urban census tracts. In order to qualify for the full 30% credit, the project must pay the prevailing wage for labor and meet certain apprenticeship requirements. If it does not, the credit is limited to 6%. The amount of the credit reduces the depreciable basis of the EV charging equipment. New Clean Vehicle Credit The original user of a new, qualified plug-in EV or fuel cell electric vehicle (FCV) placed in service after April 17, 2023, is potentially eligible for up to a $7,500 credit. The vehicle must have a GVWR of less than 14,000 pounds, and the battery must have a capacity of at least sevenkilowatt hours. The taxpayer must acquire the vehicle for use or lease (not for resale). The amount of the credit reduces the basis of the vehicle. Vehicles must undergo final assembly in North America and meet critical mineral and battery component requirements. Vehicles that meet either the critical mineral or battery component requirements may be eligible for a $3,750 credit, while those that meet both may qualify for $7,500. There are caps on the MSRP for eligible vehicles ($80,000 for trucks, vans or SUVs and $55,000 for all other passenger vehicles), and high-income taxpayers will not qualify for the credit. 16 Virginia Auto Dealer
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