If your business is buying new assets in 2018, the new tax law could benefit you in several ways. The Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, even provides some opportunities that you may be able to take advantage of on your 2017 tax return.
Much better bonus depreciation
Under pre-TCJA law, for qualified new assets that your business places in service in 2017, you can claim a 50 percent first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture and so forth.
In addition, 50 percent bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. However, qualified improvement costs don’t include expenditures for the enlargement of a building, addition of an elevator or escalator, or the internal structural framework of a building.
Bonus depreciation improves significantly under the TCJA: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100 percent. In addition, the 100 percent deduction is allowed for both new and used qualifying property.
The new law also allows 100 percent bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
In later years, bonus depreciation is scheduled to be reduced as follows:
- 80 percent for property placed in service in 2023.
- 60 percent for property placed in service in 2024.
- 40 percent for property placed in service in 2025.
- 20 percent for property placed in service in 2026.
It’s important to note that for certain property with longer production periods, the preceding reductions are delayed by one year. For example, 80 percent bonus depreciation will apply to long-production-period property placed in service in 2024.
Section 179 deduction enhanced permanently
When 100 percent first-year bonus depreciation isn’t available, the Sec. 179 tax break can provide similar benefits. Sec. 179 allows eligible taxpayers to deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to various limitations.
Under pre-TCJA law, for tax years that began in 2017, the maximum Sec. 179 depreciation deduction is $510,000. The maximum deduction is phased out dollar for dollar to the extent the cost of eligible property placed in service during the tax year exceeds the phaseout threshold of $2.03 million.
Qualified real property improvement costs are also eligible for the Sec. 179 deduction. This real estate break applies to:
- Certain improvements to interiors of leased nonresidential buildings,
- Certain restaurant buildings or improvements to such buildings, and
- Certain improvements to the interiors of retail buildings.
Deductions claimed for qualified real property costs count against the overall maximum for Sec. 179 deductions ($510,000 for tax years that began in 2017).
The TCJA permanently enhances the Sec. 179 deduction. Under the new law, for qualifying property placed in service in tax years beginning in 2018, the maximum Sec. 179 deduction is increased to $1 million, and the phaseout threshold amount is increased to $2.5 million. For later tax years, these amounts will be indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date on which a written binding contract for the acquisition is signed.
The new law also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for the Sec. 179 deduction is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Enhanced deductions for business passenger vehicles
For new or used passenger vehicles that are placed in service in 2018 and used for business over 50 percent of the time, the maximum annual depreciation deductions under the TCJA are as follows:
- $10,000 for Year 1.
- $16,000 for Year 2.
- $9,600 for Year 3.
- $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.
For years after 2018, these amounts will be increased for inflation.
While the Year 1 amount is a little lower than the Year 1 amount under pre-TCJA law, the TCJA allows much faster depreciation overall. For example, the 2017 limits for passenger cars are $11,160 for Year 1 for a new car ($3,160 for a used car). For subsequent years for new and used cars, the limits are $5,100 for Year 2, $3,050 for Year 3, and $1,875 for Year 4 and thereafter. Slightly higher limits apply to light trucks and light vans.
Contact us if you need clarification
The tax laws related to business depreciation will change significantly in 2018, and there are even additional tax-savings opportunities when you file your 2017 return. If you’d like to discuss your 2017 asset purchases and your future purchasing plans, or if you have any other questions about the implications of the TCJA, reach out to your KraftCPAs tax advisor so you can maximize potential tax savings under the new law.