This month’s highlight is on how the Tax Cuts and Jobs Act (TCJA) impacts depreciation and expensing. There are new rules & limits for depreciation and expensing under TCJA and it is critical to understand them because depreciation is likely the most commonly used deduction by businesses to reduce their taxable income and save taxes. item has gone through big changes under the TCJA.
IRS has issued a fact sheet that highlights some of the new rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017).
Increased expensing amounts. A taxpayer may elect to expense the cost of any Code Sec. 179 property (see below) and deduct it in the year the property is placed in service. The TCJA increased the maximum deduction from $500,000 to $1 million, and increased the phase-out threshold from $2 million to $2.5 million, effective for property placed in service in tax years beginning after 2017.
The TCJA also expanded the definition of Code Sec. 179 property, also effective for property placed in service in tax years beginning after 2017, to allow taxpayers to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:
- Qualified improvement property, which means any improvement to a building’s interior, except improvements attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
- Roofs, HVAC, fire protection systems, alarm systems and security systems.
First-year bonus depreciation. The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (Jan. 1, 2024 for certain aircraft and property with longer production periods). 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%.
The definition of property eligible for 100% bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017 if:
- The taxpayer didn’t use the property at any time before acquiring it, or acquire the property from a related party or 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, and 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 e.g., in a like-kind exchange or involuntary conversation.
Luxury auto limits. The TCJA 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 tax year in the recovery period.
On the other hand, if a taxpayer claims 100% 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 tax year in the recovery period.
If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call at 602-482-9101 or email me at nitin.gupta@atlascpas.com.
About the Author
Nitin Gupta is a Partner and CPA at ATLAS CPAs & Advisors PLLC and licensed in California and Arizona as a Certified Public Accountant. With 28+ years of experience, Nitin has been a Tax Consultant with full expertise in federal, state, and local taxation for highly complex corporations, partnerships, individuals, estate, gift, and trust tax returns. He has extensive experience in all aspects of financial accounting in multiple industry segments such as real estate, construction, medical, manufacturing, wholesale, retail, professional services, information technology, and entertainment.
