Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax law and how they might affect you or your business.
The Tax Cuts and Jobs Act (TCJA) has made a number of favorable changes in the availability of expensing allowances for depreciable property. These include increasing the IRC Section 179 expensing limit; expanding bonus depreciation to include both new and used property; and allowing for 100% write off for the year the qualified property is placed in service.
More Favorable Bonus Depreciation Provisions
Under prior law, taxpayers were able to claim a 50% first-year bonus depreciation deduction for qualified new assets. In addition, used property did not previously qualify for bonus depreciation.
Under TCJA, bonus depreciation has been significantly improved. For qualified property placed in service after September 27, 2017 and before January 1, 2023, the first-year bonus depreciation percentage is increased to 100%. In addition, the 100% deduction is allowed for both new and used qualifying property. In later years, the bonus depreciation is scheduled to be reduced as follows:
- 80% for property placed in service in 2023;
- 60% for property placed in service in 2024;
- 40% for property placed in service in 2025;
- 20% for property placed in service in 2026;
Enhancement of Section 179 Deduction
When 100% bonus depreciation is not available, the Section 179 deduction can provide similar benefits. Permitted expensing, which allows a taxpayer to immediately deduct the cost of qualifying property, is increased to a maximum deduction of $1 million for property placed in service after 2017, and the phase-out threshold is increased to $2.5 million. For later tax years, both the $1 million and the $2.5 million amounts will be indexed for inflation.
The expense election has also been expanded to cover (1) certain depreciable tangible personal property used mostly to furnish lodging or in connection with furnishing lodging, and (2) the following improvements to nonresidential real property made after it was first placed in service: roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; security systems; and any other building improvements that aren’t elevators or escalators, don’t enlarge the building, and aren’t attributable to internal structural framework.
Depreciation of Qualified Improvement Property
Under the new law, “qualified improvement property” is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is defined as any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was first placed in service, except for any improvement for which the expenditure is attributable to (1) the enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.
The new law also eliminates the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that were in place under prior law. Most significantly, the newly defined class is eligible for both bonus depreciation and Section 179 expensing.
If you have any questions about tax reform changes, please call Liz Belcher at (317) 613-7846 or email email@example.com.
Click here for detailed article on the “Pass-Through Income Deduction”
Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”
Click here for summary of “Key Provisions Affecting Individual Taxpayers”
Click here for summary of “Key Provisions Affecting Business Taxpayers”