The Tax Cuts and Jobs Act now allows businesses to expense more – including a 100 percent temporary expensing for certain assets – and changes depreciation limits on luxury cars and personal-use property.
Here’s a snapshot of the key points for your business clients to be aware of:
Taxpayers can choose to expense the cost of any Section 179 property and deduct it in the year that the property is placed in service, according to the IRS. The maximum deduction allowed is increased from $500,000 to $1 million, and the phase-out threshold has increased from $2 million to $2.5 million.
The law also changes the definition of Section 179 property to allow taxpayers to include the following improvements to nonresidential real property after it was first placed in service: any improvements to a building’s interior but they don’t qualify if they are due to building enlargement, any elevator or escalator or the internal structural framework; roofs, heating and air-conditioning, fire protection, and alarm and security systems.
Temporary 100 Percent Expensing for Certain Business Assets
The bonus depreciation percentage increases from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The percentage for property acquired before Sept. 28, 2017 and placed in service before Jan. 1, 2018 remains at 50 percent. Special rules apply for longer production period property and certain aircraft.
How property that qualifies for the 100 percent bonus depreciation is defined now includes used qualified property acquired and put in service after Sept. 27, 2017, if the following applies:
- the taxpayer didn’t use the property before acquiring it
- it wasn’t acquired from a related party or from a component member of a controlled group of corporations
- the taxpayer’s basis of the used property isn’t based in whole or part by reference to the adjusted basis of the seller or transferor
- the taxpayer’s basis isn’t figured under the provision for deciding basis of property that has been acquired by a decedent
- the cost of the used property that is eligible for bonus depreciation doesn’t include any carryover basis of the property, such as in a like-kind exchange or involuntary conversion.
The law also adds qualified film, TV and live theater productions as types of property eligible for 100 percent bonus depreciation, provided that the property was acquired and put in service after Sept. 27, 2017.
Property Not Eligible for Bonus Depreciation
This includes property primarily used in the trade or business of the furnishing or sale of electrical energy, water or sewage disposal services; gas or steam through a local distribution system; transportation of gas or steam by pipeline, and any property used in a trade or business that has floor-plan financing, which is secured by motor vehicle inventory that is sold or leased to retail customers.
Depreciation Limits on Luxury Cars and Personal-use Property
This applies to passenger vehicles put in service after Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the highest allowable depreciation deduction is $10,000 in the first year; $16,000 for the second; $9,600 for the third; and $5,760 for each later taxable year in the recovery period.
If bonus depreciation is claimed, the highest allowable deduction is $18,000 only for the first year; the remaining years are the same as if the depreciation isn’t claimed. The law removes computer or peripheral equipment from the definition of listed property. That applies to property put in service after Dec. 31, 2017.
Treatment of Certain Farm Property
The recovery period for farming machinery and equipment shortens from seven to five years. Grain bins, cotton ginning assets, fences or other land improvements are not included. Original use of the property must be after Dec. 31, 2017. The recovery period is effective for property put in service after Dec. 31, 2017.
Property put in service after Dec. 31, 2017 isn’t required to use the 150 percent declining balance method. However, if it is 15-year or 20-year property, that method should be used.
Applicable Recovery Period for Real Property
The general recovery period remains at 39 years for nonresidential real property and at 27.5 years for residential rental property. But the law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years.
Qualified leasehold improvement property, restaurant property and retail improvement property are no longer defined separately and now are given a special 15-year recovery period.
The changes affect property placed in service after Dec. 31, 2017.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.