Changes to depreciation

Depreciation rules have changed with the new 2018 TCJA tax laws.  Businesses can immediately expense more and should be aware of the changes so that they can take advantage of the deductions.  The changes affect bonus depreciation and Section 179 depreciation.

Bonus depreciation percentage has increased from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.  As a result of the changes, businesses can often write off the full cost of most depreciable property in the first year they use it in their business, rather than depreciating it over its recovery period.  Depreciable business assets with a recovery period of 20 years or less and certain other property normally qualify for the bonus depreciation.  Assets such as machinery, equipment, computers, appliances, and furniture generally qualify.

Another method to expense assets in the first year is the Section 179 deduction.  Businesses may elect to expense all or part of the cost by claiming the Section 179 property and deducting it in the year they place the property in service.  The maximum deduction is increased to $1,000,000, and the phase-out threshold is increased to $2,500,000.  These amounts are adjusted annually for inflation and apply to property placed in service beginning in 2019.

Section 179 property includes business equipment and machinery, office equipment, livestock and if elected, qualified real property.  Also, taxpayers can elect to include certain improvements made to nonresidential real property.

The new law also changes the definition of section 179 property to allow the taxpayer 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.  However, improvements do not qualify if they are 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.

 

These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017. 
The Tax Cuts and Jobs Act (TCJA) changed depreciation limits for passenger vehicles placed in service starting in tax-year 2018.  If a business 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 taxable year in the recovery period.

If 100 percent bonus depreciation is claimed, 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 taxable year in the recovery period.

These amounts apply to property placed in service starting in 2018.

 

David Zubler is the author of three books and a philanthropist.  All of his proceeds from the books go to a charitable foundation he created for underprivileged children.  He is also the founder of Your Tax Care which provides tax education.