One of the major tax benefits companies derived from the Tax Cut and Jobs Act (TCJA) signed into law by former President Donald Trump has entered the phase-out stage. Prior to the TCJA, businesses had to report the depreciation of a capital asset over the course of its life, but the law allowed businesses to claim the depreciation of qualifying assets all at once for a short period of time.
Immediate expensing under U.S. Code § 179 that opened this possibility to businesses, including E-2 visa companies, will phase out each year by 20% until eventually reaching 0% (a return to pre-TCJA levels) in 2027. This means the depreciation of assets placed into service after January 1st on each of the following years can be claimed at the following rate:
- 2023 – 80%
- 2024 – 60%
- 2025 – 40%
- 2026 – 20%
- 2027 and after – 0%
Additional changes to the law may alter those numbers, but as of this writing, those are the rates E-2 visa companies should plan on not being able to immediately expense the depreciation of an asset. If you have assets that were placed into service after September 27, 2017, and before January 1, 2023, then you can still claim 100% of the depreciation immediately.
This change has a significant impact on profits and revenues for companies as the long-term depreciation capture will produce higher tax bills. For example, if you purchased an expensive piece of equipment for your company for $200,000 in 2022 and immediately placed it into service then your company can claim the total anticipated depreciation upfront with the government. Say you expect the asset to depreciate by 50% ($100,000) over the course of its useful life (10 years) then you can claim a $100,000 business expense for the 2022 tax year.
However, if you purchased the same equipment but did not place it into service until February 2023, then you would only be able to expense 80% of the anticipated depreciation for the 2023 tax year. This means you can claim $80,000 of the anticipated $100,000 in depreciation, leaving $20,000 to be expensed in portions over the next several years. This same asset must be expensed at the actual level of claimed depreciation each year from January 1, 2027, and after (meaning you can only claim the actual depreciation of the asset for that year and not any additional anticipated depreciation).
The value of your assets will hold a higher value each individual tax year, heavily impacting accounting for E-2 visa companies investing in the US. An asset that was previously depreciated to a $100,000 value will now hold a higher value until it reaches its full depreciated value years down the line.
Companies operating under US tax law need to be fully aware of the implications of changes like this and any other changes that impact accounting, profits, and losses. If your E-2visa business is operating within the United States and needs help navigating these and other business immigration issues, contact the team at Valvo & Associates to get the expert guidance you deserve.