Tax Reform Changes to Depreciation

By June 25, 2018 July 5th, 2019 Business Tax Planning, June Tax Newsletter

By: Tom Ohlgren, Senior Tax Manager

The Tax Cuts and Jobs Act (“TCJA”) provides several benefits when your company buys new assets in 2018, and also contains some benefits for your 2017 tax return as well.

Immediately prior to the TCJA, taxpayers could deduct 50% of the cost of tangible personal property placed in service during the tax year, and then could apply accelerated depreciation to the remaining 50% of the cost.  The new rules increase the bonus depreciation from 50% to 100% for assets (new or used (as long as the asset is new to the taxpayer)) acquired and placed into service after September 27, 2017, providing an opportunity to maximize deductions in 2017 when income was subject to a higher rate of tax.

As noted above, the TCJA expanded eligible property to include used (with some narrow exceptions) assets. This provision will be especially important for taxpayers acquiring capital-intensive businesses that are treated as asset acquisitions for tax purposes.

The full-expensing provision will eventually be phased out, but phase out does not begin until 2023 and decreases to 0% in 2027.  As with prior bonus depreciation, taxpayers can elect out of the full expensing, and taxpayers in a loss situation may want to consider this option due to certain state limitations on bonus depreciation.

Section 179 Expensing

Immediately prior to the TCJA, taxpayers could elect to deduct the entire cost of certain property up to an annual limit of $500,000 (adjusted for inflation each year – in 2018, the amount would have been $520,000).  This limit was subject to a phase-out for taxpayers exceeding a $2 million inflation-adjusted threshold of assets placed in service during the year.  Under tax reform, the new annual deduction limit is $1 million (which will be inflation-adjusted after 2018), and the threshold amount of assets placed in service for phase-out has been increased to $2.5 million, expanding the availability of §179 expensing to more taxpayers.  There are additional changes that expand eligible property to include some nonresidential building improvements as well.

There are other changes that are more specific to certain taxpayers, please contact Tom Ohlgren at 818.981.2600 for additional information on the changes summarized above.