Good News for businesses! That big asset you’ve been thinking about acquiring may now bring you a larger than ever first-year bonus depreciation deduction! Bonus depreciation has been a popular provision in the tax code because it allows the taxpayer to deduct, through depreciation, a significant portion of assets placed into service during the year. The Tax Cuts and Jobs Act expanded this provision even further for property placed into service after September 27, 2017.
In order to fully appreciate the changes the TCJA has brought we’ll take a brief look at the bonus depreciation rules for property acquired and placed into service before September 27, 2017. Before the TCJA, 50% of the cost of most new tangible property placed into service was allowable in addition to regular depreciation in the year placed into service. The 50% bonus was to be phased down to 40% for property placed into service in calendar year 2019 and by 2020 was to be completely phased out.
After the TCJA took effect that bonus percentage was raised from 50% to 100% appropriately called “full expensing”.
Another change to bonus depreciation rules was that the TCJA eliminated certain section 179 property categories dealing with buildings and land improvements and substituted a much broader qualified improvement property category which includes property no longer eligible for bonus depreciation. Also, taxpayers can now elect (for non-rental real estate buildings) 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. To put it more simply, items used in connection with residential buildings (for example, refrigerators: not the buildings themselves) are eligible to be section 179 property. This qualified improvement property, in addition to no longer qualifying for bonus depreciation and its newfound eligibility as section 179 property, has a 15 year depreciation period rather than the usual 39 year period for non-residential buildings. Apartments and other residential rentals placed in service after 2017 generally continue to be depreciated over a 27.5 period as before.
The above mentioned equipment qualifying for Section 179, can be deducted up to $1,020,000 for equipment placed into service in 2019, increased to $1,040,000 in 2020. Another thing to keep in mind is that once a taxpayer has spent $2,550,000 on equipment (or $2,590,000 in 2020) the section 179 deduction begins to be phased out dollar for dollar. This spending cap truly makes the deduction an incentive for smaller businesses as most large businesses would generally exceed the cap. However, no reason to despair, bonus depreciation is being offered at 100% in 2019 and since it isn’t subject to a spending cap this is a nice benefit for the larger businesses that may not qualify for the section 179 deduction.
As always, it is wise to plan carefully. Even though the Tax Cuts and Jobs Act allows a 100% bonus depreciation deduction on qualifying property, it may not always be beneficial for the qualifying business to take the additional deduction. For example: if the deduction results in a loss which may be disallowed, the taxpayer may consider taking the section 179 expense for some assets that would qualify for bonus depreciation as well. A business may elect out of bonus depreciation any given year, so it may be advantageous to use section 179 expense in order to avoid any disallowed losses. With anything tax related it is important to remember to take a broad view approach, to step back from the details and determine the most favorable tax position given all of the circumstances.