Recently, we helped several customers update their systems to be compliant with 80% Bonus Depreciation regulations that went into effect on January 1, 2023.

Before we talk about that, let’s take a minute to travel back in time to better understand how we got here! (Play harp music.)

In 2017, the Ford F-Series was the best-selling vehicle in the U.S. If you were looking to drive one off the lot, you would need around $30,000 in cash or financing. Coincidentally, in December of that year Congress passed the Tax Cut and Jobs Act (TCJA) enabling companies offering tax leases to take 100% bonus depreciation!

Well, the days of the $30K F-150 are in the rearview mirror. Today, a new F-150 will run you $45K to $85K, depending on the trim level. Additionally, beginning January 1, 2023, the IRS began phasing out bonus depreciation by 20% each year thru 2026.

For the last five years, it’s been easy for finance companies to update their systems to support 100% bonus depreciation. In Solifi’s Lease and Loan Portfolio Management Software (formerly InfoLease), this step was as easy as defaulting 100.00 in the first year of the annual depreciation percentages!

This year, the calculation is more complicated as the remaining 20% must be depreciated over the life of the asset.

For example purposes, let’s assume you are looking to finance a new 2023 F-150 Lightning with Platinum trim. MSRP is listed at $98,000, but we will round up to $100,000 and use a five-year light-truck MACRS half-year depreciation schedule. This example asset was booked in the first half of the year.

Year Annual Percent Depreciation Amount
1 84.00% $84,000
2 6.40% $6,400
3 3.84% $3,840
4 2.304% $2,304
5 2.304% $2,304
6 1.152% $1,152
Total 100% $100,000

To solve for the above annual depreciation percents, we first took 80% depreciation of the asset in year one. Then, with the remaining $20,000 basis, we applied the 5-year MACRS half-year for years 2 through 6. Note that the first-year percentage represents the normal tax depreciation percentage for that year PLUS the 80% bonus.

The same methodology would be applied to 3- and 7-year assets.

Using the MACRS depreciation functionality native to the software, the depreciation percentages will calculate based on the standard MACRS schedule. However, there is also the ability to specify the depreciation percentages each year. As noted above, with 100% bonus, the 100 can be put in the first year of depreciation percentages. However, with 80% bonus, the asset is not fully depreciated in the first year, so the other years of depreciation percentages need to be specified.

Note that there are 6 percentages to be entered for a 5-year asset because of half-year convention.

In the software, select the contract that needs the depreciation percentages entered. The only lease types with tax depreciation will be True Lease or Operating Lease contracts.

Select each asset that has a tax depreciation basis and select the Depreciation tab. Click Edit to make the necessary updates and then, on the Tax Depreciation data screen, click “Percents Method.” This will open a new window with headings of Year and Percent.

Enter each percentage as in the table above. If this is a 5-year asset, the percentages would be 84%, 6.4%, 3.84%, 2.304%, 2.304% and 1.152% for the 6 values. At the bottom of the Percent column it will add in each percentage and the total must equal 100%.

Once the percentages are entered, click OK on the Depreciation screen and then Save. Repeat for each asset that has a tax depreciation basis.

You will not see an immediate change to the amount of tax depreciation for each asset as this is a month-end calculation. It will update appropriately after the next month-end process is completed.

If you would like help calculating depreciation schedules for assets with different Life In Months (LIM), or for help backfilling already booked assets, please reach out to Tamarack.

 
Written by

Tamarack

Tamarack Technology, Inc. is a leading provider of independent software, operational, and technology services supporting the equipment finance industry for more than 20 years.

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