Changes to Depreciation in the Tax Cuts and Jobs Act
February 22, 2018 by April Thiel, CPA
Earlier this year one of the biggest tax reforms in the last 10 years was passed with many changes that will impact every America citizen. For those individuals with businesses it is important to note that unless you know every aspect of the reform you should schedule an appointment with your tax advisor to discuss the changes and how it affects your situation.
SECTION 179 EXPENSING AND BONUS DEPRECIATION
The Tax Cuts and Jobs Act (TCJA) has effectively lowered the cost of acquiring capital assets by making substantial changes to the income tax rules for bonus depreciation and other “cost recovery.”
Bonus depreciation – Before the TCJA, taxpayers were allowed to deduct 50% of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year placed in service (with adjustment of the regular depreciation deductions allowed in that year and later years). The “50% bonus depreciation” was to be phased down to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and afterward.
Under the TCJA, property placed in service and acquired after Sept. 27, 2017 (with no written binding contract for acquisition in effect on Sept. 27, 2017), the TCJA raised the 50% rate to 100%. (Appropriately, 100% bonus depreciation is also called “full expensing” or “100% expensing”.)
Additionally, the post-Sept. 27, 2017 property eligible for bonus depreciation can be new or used. Also, certain film, television and live theatrical productions are now eligible.
On the other hand, the TCJA repealed the eligibility of “qualified improvement property” (certain improvements to buildings other than residential rental buildings). The TCJA also excluded from bonus depreciation public utility property and property owned by certain vehicle dealerships.
The 2018/2019/2020 phase down (above) doesn’t apply to post-Sept 27, 2017 property. Instead, 100% depreciation is decreased to 80% for property placed in service in calendar year 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027 and afterward.
Code Sec. 179 expensing – Before the TCJA, most smaller taxpayers could immediately deduct the entire cost of section 179 property up to an annual limit of $500,000 adjusted for inflation. For property placed in service in tax years that begin in 2018, the inflation adjusted limit was scheduled to be $520,000. The annual limit was reduced by one dollar for every dollar that the cost of all section 179 property placed in service by the taxpayer during the tax year exceeded a $2 million threshold adjusted for inflation. For property placed in service in tax years that begin in 2018, the threshold was scheduled to be $2,070,000. But for tax years beginning after 2017, the TCJA substitutes as the annual dollar limit $1 million (inflation-adjusted for tax years beginning after 2018) and $2.5 million as the phase down threshold (similarly inflation adjusted).
Before the TCJA, section 179 property included most tangible personal property as well non-customized (“off-the-shelf”) computer software. Generally, the only buildings or other land improvements that qualified were restaurant buildings and certain improvements to leased space, retail space or restaurant space that were treated as section 179 property under an election. The TCJA, for tax years beginning after 2017, eliminated these categories and substituted as an elective category the much broader qualified improvement property category (that is no longer eligible for bonus depreciation, see above). Also, taxpayers can, for buildings other than rental real estate buildings, elect to treat as section 179 property previously ineligible building components that are roofs, heating, ventilation and air conditioning property, fire protection and alarm systems, or security systems.
Additionally items (for example refrigerators) used in connection with residential buildings (though not the buildings themselves) are eligible to be section 179 property.
Other rules for real property depreciation – If placed in service after 2017, qualified improvement property, in addition to no longer qualifying for bonus depreciation and being newly eligible as section 179 property, has a 15-year depreciation period (rather than the usual 39-year period for non-residential buildings).
Apartment buildings and other residential rental buildings placed in service after 2017 generally continue to be depreciated over a 27.5 period, but should the alternative depreciation system (ADS) apply to a building either under an election or because the building is subject to one of the conditions (for example, tax-exempt financing) that make ADS mandatory, the ADS depreciation period is 30 years instead of the pre-TCJA 40 years.
For tax years beginning after 2017, if a taxpayer in a real property trade or business “elects out” of the TCJA’s limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under ADS.