Depreciation Changes Under the Tax Cuts and Jobs Act

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The Tax Cuts and Jobs Act of 2017 impacted nearly all levels of the Internal Revenue Code. Several code sections that govern the manner in which assets purchased for use in businesses are depreciated may have favorable implications for taxpayers.

Section 179 Expense

Section 179 has been expanded and increased to allow taxpayers a deduction of up to $1,000,000 and has increased the phase-out threshold to $2,500,000 of qualified property. The increase in deduction and threshold limitations is effective for tax years beginning after December 31, 2017.

Bonus Depreciation

Bonus depreciation has been expanded and increased from 50 to 100 percent for qualifying assets placed in service beginning after September 27, 2017 through December 31, 2022. After December 31, 2022, the deduction percentage will decrease by 20 percent per year until it is fully phased out after 2026. Bonus depreciation is now available on new and used assets.

Three notable differences exist between bonus depreciation and Section 179:

  1. Bonus depreciation can be taken by a business operating at a tax loss.
  2. Bonus depreciation does not phase out based on capital expenditure costs; the deduction is available for all qualifying assets.
  3. The mechanics of Section 179 may allow taxpayers to more accurately target a taxable income number. Bonus depreciation must be taken on all assets in a class life, where Section 179 can be taken on specific assets.

Change to Depreciable Lives

Qualified Improvement Property (“QIP”) became a classification category in 2016 and has been enhanced by the Tax Cuts and Jobs Act. The following requirements must be met for property to be treated as QIP:

  1. The improvement is placed in service after the building was first placed in service.
  2. The improvement is an improvement to the interior portion of a building that is nonresidential real property, excluding:
    1. Enlargements;
    2. Elevators/escalators; and
    3. Internal structural framework.
  3. The improvements do not need to be made pursuant to a lease.

The Tax Cuts and Jobs Act has also expanded the definition of eligible Section 179 property to include QIP. Specific examples of improvements made to nonresidential real property for which taxpayers may derive a benefit include roofs, heating, ventilation, air conditioning, fire protection, and security systems.

It is important to note that, as of this publication, QIP placed in service after December 31, 2017 is depreciated over 39 years and may not be eligible for bonus depreciation. While it appears to have been the intention of the IRS to allow a 15 year recovery period and bonus depreciation on QIP property, the final law excluded these provisions. The 39 year recovery period will remain until the IRS issues a technical correction to the law.

Luxury Auto Depreciation Limits

The tax law changed depreciation limits for passenger automobiles. A Passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight for trucks and vans. It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile.

A passenger automobile does not include:

  1. An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business; or
  2. A vehicle used directly in the trade or business of transporting persons or property for compensation or hire.

The maximum allowable depreciation deduction on an asset, for which bonus depreciation is not claimed, is increased to $10,000 for the year it’s placed in service, $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 maximum allowable depreciation deduction is increased to $18,000 for the year it’s placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for each later taxable year in the recovery period.

Andrew R. Berger can be reached at Email or 215.441.4600.

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