Today marks the midpoint of National Small Business Week 2018. What better way to celebrate than by taking a look at the Tax Cuts and Jobs Act's changes to depreciation and expensing.
Yeah, I know. But it is a tax blog. So here goes, courtesy a fact sheet on the topic issued by the Internal Revenue Service.
Expensing enhancements: Expensing under Internal Revenue Code section 179 allows businesses an immediate tax break on some property rather than making them spread out the assets' tax value over years via depreciation.
Companies can still choose to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The TCJA, however, now lets businesses immediately expense more.
The maximum section 179 deduction has increased from $500,000 to $1 million. The TCJA also increased the phase-out threshold from $2 million to $2.5 million.
Expanded property definition: As for what can be expensed, the TCJA expands the definition of section 179 property.
Business taxpayers now can elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:
- Roofs, HVAC, fire protection systems, alarm systems and security systems.
- Qualified improvement property, which means any improvement to a building’s interior.
Note, however, improvements here do not qualify if they are attributable to the enlargement of the building; connected to any elevator or escalator; or involve the internal structural framework of the building.
The IRS says these §179 property changes apply to property placed in service in taxable years starting Jan. 1, 2018.
Bonus depreciation boost: The new tax law allow allows for temporary 100 percent expensing, aka first-year bonus depreciation, for certain business assets.
Note, however, the dates of service that affect this tax break.
The TCJA increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent.
Special rules apply for longer production period property and certain aircraft.
Added property rules: The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if all the following factors apply:
- The taxpayer didn't use the property at any time before acquiring it.
- The taxpayer didn't acquire the property from a related party.
- The taxpayer didn't acquire the property from a component member of a controlled group of corporations.
- The taxpayer's basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
- The taxpayer's basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
Also, the cost of the used qualified property eligible for bonus depreciation doesn’t include any carryover basis of the property, for example in a like-kind exchange or involuntary conversion.
New depreciation limits: The TCJA also make changes to depreciation limitations on luxury automobiles and personal use property.
Specifically, it changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017. If the taxpayer 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 a taxpayer claims 100 percent bonus depreciation, 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.
The new law also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after Dec. 31, 2017.
You can read the full IRS Fact Sheet 2018-9 for additional business depreciation changes under the new tax law.
You also might find these items of interest:
- 4 tax tips for new businesses
- Family businesses get estate tax break thanks to Treasury decision to revoke tax regulation
- Small businesses' many new tax considerations, plus some tax tips, to celebrate Small Business Week
