Key Changes for 2023/2024 Tax Years

As we enter the 2024 tax year, there are a few important tax law changes that we’d like to bring to your attention:

• Bonus Depreciation –Federal bonus depreciation allows for accelerated deduction of the cost of qualifying business assets. For a number of years, Federal bonus depreciation allowed in the year of purchase was 100% which meant a business could deduct the full cost of the property in the first year it was placed in service.  Starting in 2023 and continuing for the next few years, allowable bonus depreciation will decrease.  The bonus depreciation rate for 2023 is 80% and for 2024 the percentage drops to 60%.  Though the amount a taxpayer is able to deduct in the first year is decreasing, the residual cost basis of the property will be depreciated and deducted over the property’s remaining useful life.  There are other provisions that allow for full depreciation (Section 179) in the first year of service, but these provisions have limitations.  Currently, Congress is working to formulate a Bill to postpone this decrease in Bonus Depreciation to 2026.  Please keep in mind that California does not conform to bonus depreciation but does allow Section 179 deduction.

• Meals & Entertainment – After two years of 100% deductibility at the Federal level, business meals purchased at restaurants have been limited in deductibility again. Starting in 2023 and continuing through 2024, business meals are limited to 50% deductibility for Federal tax purposes.  This limitation does not apply to special company events where all employees are invited to join, such as holiday parties.

Entertainment has been disallowed for Federal tax deduction purposes since 2018 but remains a deduction for California tax purposes at 50% of cost.

• Estate and Gift Considerations – The annual gift tax exclusion increased from $17,000 in 2023 to $18,000 in 2024, to adjust for economic inflation. The lifetime gift exemption for estate tax purposes was increased from $12.92 million in 2023 to $13.61 million in 2024 per taxpayer.  This may seem like a very large number for some but it’s important to be aware of the sunset of this provision that is scheduled to take effect at the end of 2025.  When the Tax Cuts and Jobs Act expires on December 31, 2025, the lifetime gift exemption will drop back down to previous levels of $5 million but with inflation adjustments, it is projected to be closer to $6 million.  With political uncertainty heading into this election year, there’s no guarantee the current terms will be extended past 2025.  It would be prudent to review your estate plan to determine if there is any gifting to be implemented before the potential expiration at the end of 2025.

If you have any questions regarding these updates to the tax rules, feel free to reach out to your representative with DKC.