Depreciation Update: The Tax Cuts & Jobs Act
The Tax Cuts and Jobs Act (TCJA) brought about many substantial changes for business and rental owners. Some of the biggest changes came to the accelerated expensing of capitalizable assets. The TCJA made significant changes to bonus depreciation, Section 179 deduction and depreciation of automobiles.
The TCJA increased the bonus depreciation rate from 50% to 100% for property purchased and placed in service after September 27, 2017 and before January 01, 2023. Therefore, eligible property purchased in the next five years will be fully deductible in the year placed in service. Starting in 2023 the rate is scheduled to decrease 20% each year, with bonus fully phased out by 2026.
The act further modified the criteria for taking bonus depreciation. Under the new law taxpayers can claim bonus depreciation on used property. In prior years bonus depreciation was limited to only brand-new property.
On the reverse side, the new law inadvertently made interior improvements to commercial property ineligible for bonus depreciation. Congress may, however, issue a “technical correction” to allow bonus on these improvements once again.
SECTION 179 DEDUCTION
Under the old law taxpayers could elect on an asset-by-asset basis to immediately deduct the entire cost of Section 179 property (generally business assets other than building structures) up to an annual limit of $500,000 (adjusted for inflation annually). The annual deduction was reduced by one dollar for every dollar of total purchases exceeding an investment limitation of $2 million.
For example, a taxpayer with eligible purchases of $2.1 million would have been allowed to take immediate 179 deductions of $400,000 (the annual reduction was reduced $100,000 for the amount of purchases exceeding the investment limitation). The remaining costs are depreciated under the normal depreciation rules.
The TCJA increased the annual deduction from $500,000 to $1 million (also adjusted for inflation annually). It also increased the investment limitation from $2 million to $2.5 million (similarly adjusted for inflation).
Starting in 2018, the taxpayer described in the example above will be able to take a 179 deduction of $1 million due to the increase in annual deduction and increase in investment limitation.
The TCJA also broadened the scope for eligible property. Under the new laws, the following will be eligible for 179 deduction:
internal improvements to existing nonresidential real property;
replacement roofs and HVACs on nonresidential real property; and
personal property acquired for use in residential rental property (e.g., appliances, furniture, and carpeting).
Vehicles are subject to annual depreciation limits. The new tax law dramatically increased these limits for automobiles purchased starting in 2018.
Vehicles with GVWR (Gross Vehicle Weight Rating) over 6,000 lbs are not subject to depreciation caps and under the new laws may take 100% bonus depreciation.
The Doty Group is a full-service CPA firm offering Tax, Audit, Valuation, and Advisory Services to Business and Individuals in Tacoma, WA. If you have more questions regarding this or other Tax Reform matters, please give us a call at (253) 830-5450 or e-mail firstname.lastname@example.org.