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TAX

Now that taxpayers have taxpayer could have an overall benefit by capital-
In tax years beginning prior to Jan. 1, 2022, the

been following the final izing otherwise deductible repairs because of the
depreciation addback required in computing ATI.
(Of course, the benefit relies upon the capitalized
rules since 2014, it may be amounts being eligible for bonus depreciation; the
taxpayer would not have the same immediate im-
time to review and refresh pact if the repair was for a roof, which is ineligible
for bonus depreciation and would be depreciated
over 39 years under MACRS.) Beginning in 2022,
tax decisions to reflect the however, because the addback of depreciation is
phased out, the taxpayer would generally have the
same federal income tax impact by claiming the
taxpayer’s current policies $1 million as either a repair expense or a bonus
depreciation deduction. Because the election to
and practices. capitalize in any tax year applies to all amounts
paid for repairs in that year, a taxpayer that incurs
amounts to repair both bonus-eligible and bonus-
ineligible property may now want to carefully
weigh the costs and benefits of analyzing the
amounts. Capitalizing and depreciating no longer
repairs and depreciating them, especially if the as- provides the Sec. 163(j) benefit, but the taxpayer
set also qualified for bonus depreciation under Sec. still has the “unfavorable” impact from capitalizing
168(k). Similarly, taxpayers may have benefited long-lived property (e.g., a roof) and depreciating
from not making a partial-disposition election it over a long period (e.g., 39 years) rather than
and continuing to depreciate the full asset and the taking an immediate repairs deduction.
replacement or improvement.
An illustration of a potential benefit in prior Sec. 168(k) bonus depreciation phaseout
years might be helpful: The TCJA made a number of changes to the
additional first-year depreciation deduction under
Example: During its 2021 tax year, Taxpayer A Sec. 168(k), including expanding it to include both
pays $1 million to have its parking lot repaired, original-use and “used” property and temporarily
including sealing cracks, striping, and doing setting the rate at 100%. Under Sec. 168(k)(6),
minor replacement of asphalt. For financial that rate applies to eligible property acquired and
statement purposes, A capitalizes the $1 million placed in service after Sept. 27, 2017, and before
and begins to depreciate it over its GAAP life. A Jan. 1, 2023. Eligible property placed in service
analyzes the project under Regs. Sec. 1.263(a)-3 during 2023 only has an 80% bonus rate, and the
and determines that it is not an improvement amount continues to decrease by 20% per year
to the parking lot and qualifies as a repair through 2026 (after which there would no longer
deduction. If A claims the deduction as a repair be any bonus depreciation in the absence of future
expense, it would reduce taxable income by legislative action).
$1 million. In computing its ATI, A makes no Returning to the parking lot example above,
adjustment for the repair expense. If A instead taxpayer A’s federal income tax deduction is the
elects to capitalize repair costs consistent with same whether the costs are capitalized and depre-
its financial statements, A will have a 100% ciated using 100% bonus depreciation or deducted
bonus depreciation–eligible land improvement, as repair expenses (ignoring the Sec. 163(j) impact
which reduces taxable income by $1 million. previously discussed). If the parking lot project is
In computing its ATI for purposes of the Sec. instead completed during 2023, the depreciation
163(j) interest deduction limitation, A will deduction is $810,000 ($1 million total cost times
add back the depreciation deduction, thereby 80% bonus depreciation = $800,000, plus the
increasing the potential interest limitation by remainder of $200,000 times the first-year rate
$300,000 (30% of $1 million), for an addi- for 15-year property of 5% = $10,000). Now, A
tional benefit. increased taxable income by $190,000 by making

30 | Journal of Accountancy February 2023