If your business is considering taking the Bonus Depreciation deduction for tax year 2023, you might want to consider filing an extension of time to file your returns. For calendar year taxpayers, the tax filing deadline for S-corporations and partnerships is March 15, and the deadline for C-corporations is April 15, so you should talk with your tax advisor soon.
Potential Changes to Bonus Depreciation
The U.S. Senate has a bill on their agenda that could retroactively reinstate the 2023 Bonus Depreciation deduction to 100 percent. The bill, known as the Tax Relief for American Families and Workers Act of 2024, passed the House of Representatives in January, and includes a provision called “American Innovation and Growth” that includes retroactively allowing 100 percent Bonus Depreciation for 2023 and extending the provision to the tax years 2024 and 2025.
The current law for 2023 allows a business to claim Bonus Depreciation deductions equal to 80 percent of the cost of a qualifying asset. If the bill passes it could have a substantial impact on the depreciation deduction for many businesses.
For example, if your business purchased $1,500,000 worth of eligible equipment in 2023, the additional 20 percent of bonus depreciation would amount to $300,000 in additional depreciation deductions. If taxed at the C-corporation tax rate of 21 percent, this would result in a reduced cash tax of $63,000.
In addition, taxes in some states would result in additional cash tax savings.
Why File an Extension of Time to File?
The short answer to “Why file an extension of time to file?” is to save time and money.
Suppose you are taking Bonus Depreciation for 2023 and you file your returns now. In this case, you will only be able to take the 80 percent Bonus Depreciation deduction. If the proposed bill becomes law, you must file amended tax returns to take advantage of the additional retroactive 20 percent Bonus Depreciation. This would be required for the federal tax return, as well as many states in which you must file.
If you file an extension for time to file, you still have to pay any taxes based on the current law (80 percent Bonus Depreciation), but if the proposed bill is passed, you won’t have to initiate and file an amended return to claim the additional bonus depreciation. An extended return can be prepared and filed based on any legislative impacts enacted after the extension date.
Many states accept the federal extension, so you may not have to file an extension in every state. However, each state has its own rules and payment requirements, so check with your tax advisor to fully understand your requirements.
While the outcome of the proposed legislation is uncertain, the filing of an extension and waiting for a conclusion will take less time and expense than filing returns timely and subsequently filing amended returns upon any law passage.
If You’ve Already Filed Your Corporate Tax Returns
If you’ve already filed your 2023 tax returns and you took Bonus Depreciation, you will simply need to wait until the outcome of the proposed legislation is decided. At that time, if the bill passes, consult your tax advisor to determine if filing an amendment makes sense for your company.
*Limitations and restrictions may apply. This information is not intended to provide tax or legal advice. Consult your local tax advisor.
