Enjoy Expanded Tax Benefits for Depreciation and Expensing
Tax Reform has impacted depreciation and expensing for nearly every business and entrepreneur. The Tax Cuts and Jobs Act changes allow business owners and the self-employed to write off the cost of machinery, equipment and other property more quickly. Here are some highlights:
100% First-Year “Bonus” Depreciation
The bonus depreciation percentage is now 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. This means that businesses can often write off the full cost of most depreciable property in the first year they use it in their business. Depreciable business assets with a recovery period of 20 years or less and certain other property usually qualify. Businesses can generally depreciate tangible property, except land. Tangible property includes:
- Buildings
- Machinery
- Vehicles
- Furniture
- Equipment
At 2023, first-year bonus depreciation goes down as follows:
- 80% for property placed in service after December 31, 2022 and before January 1, 2024.
- 60% for property placed in service after December 31, 2023 and before January 1, 2025.
- 40% for property placed in service after December 31, 2024 and before January1, 2026.
- 20% for property placed in service after December 31, 2025 and before January 1, 2027.
Special rules apply for longer production period property and certain aircraft. In addition, qualified film, television and live theatrical productions are among the types of property that may qualify for 100% bonus depreciation. You may want to read our prior article here, describing new guidance on depreciation for purchases of new or “used” property starting in 2018: Bonus Depreciation Now Carries A Bonus For Used Property
You may also want to review our article regarding “Qualified Improvement Property,” formerly a leasehold improvement, a restaurant improvement, and retail improvement property. Due to unintended errors in the way the tax reform law was worded, “Qualified Improvement Property” is not eligible for TCJA’s 100% bonus depreciation. Instead of being able to immediately deduct the entire cost of renovations and other improvements made to non-residential real estate, after 39 years businesses will only get a little more than 40% of the total cost being written off, when compared with the intended 100%. Read more here: Tax Reform Blunder has Repercussions for Restaurants and Retailers
Businesses Can Immediately Expense More
Businesses may elect to expense all or part of the cost of what is often referred to as Section 179 property, and deduct it in the year they place the property in service. The maximum deduction is increased to $1,000,000, and the phase-out threshold is increased to $2,500,000. These amounts, adjusted annually for inflation, apply to property placed in service in tax-year 2019.
Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. Taxpayers can elect to include certain improvements made to nonresidential real property. The improvements must have been made after the date the property was first placed in service. These improvements include:
- Changes to a building’s interior
- Roofs
- Heating and air conditioning systems
- Fire protection systems
- Alarm and security systems
Improvements that do not qualify:
- Enlargement of the building
- Service to elevators or escalators
- Internal framework of the building
These changes apply to property placed in service in taxable years beginning after December 31, 2017.
Depreciation Limitations on Luxury Automobiles
TCJA changed depreciation limits for passenger vehicles placed in service starting in tax-year 2018. If a business doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:
- $10,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
If 100% bonus depreciation is claimed, the greatest allowable depreciation deduction is:
- $18,000 for the first year,
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for each later taxable year in the recovery period.
These amounts apply to property placed in service starting in 2018.
Applicable Recovery Period for Real Property
The general recovery period for residential rental property is 27.5 years. TCJA changed the alternative depreciation system recovery period for residential rental property from 40 years to 30 years. Under the new law, a real property trade or business electing out of the interest deduction limit must use the alternative depreciation system to depreciate any of its residential rental property. These changes apply starting in tax-year 2018.
CONTACT US: Bonus depreciation is a valuable tax-saving tool for businesses. It allows your business to take an immediate first-year deduction on the purchase of eligible business property, in addition to other depreciation. Depreciation is a complicated business process, and the laws regarding depreciation, particularly bonus depreciation and Section 179 deductions, are always changing. Before you make a business decision to buy new property and claim a bonus depreciation expense, talk to your Fuoco Group professional. Contact us toll free at 855-534-2727.
