The Tax Cuts and Jobs Act (TCJA) combines powerful enhancements for the Section 179 “expensing” and “bonus” depreciation deductions. That’s an effective 1-2 punch that’s hard to beat.
Given the TCJA's impact on deductions, there’s a good chance that your small business clients can immediately deduct every penny of the cost of business property placed in service in 2019.
Let’s start with a basic overview of the two depreciation-related tax breaks:
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1. Section 179 deduction: Under Section 179 of the Tax Code, a business may expense—in other words, currently deduct—the cost of qualified new or used business property placed in service during the year, up to a specified limit. This includes business property with a cost recovery period of 20 years or less, depreciable software that is not amortized over 15 years, qualified leasehold improvements and water utility property
The maximum deduction has been increased in fits and starts for years, but the TCJA really gives it a jolt by doubling the amount from $500,000 to $1 million, subject to inflation indexing. The figure for 2019 is $1,020,000.
But there are a couple of limitations you should be aware of:
- The Section 179 deduction is reduced on a dollar-for-dollar basis above an annual threshold. Under the TCJA, the threshold is increased from $2 million to $2.5 million, subject to inflation indexing. The figure for 2019 is $2,030,000 million.
- The deduction can't exceed the net taxable income from the taxpayer’s business activities. For example, if a taxpayer owns a company that shows $800,000 in net taxable income and places $900,000 of property in service in 2019, the deduction is limited to $800,000.
2. Bonus depreciation: Prior to the TCJA, you could claim a bonus depreciation deduction equal to 50% of the cost of qualified new, but not used, property. The percentage allowed by the tax law has fluctuated over time.
Now the TCJA has locked in 100 percent bonus depreciation for qualified property placed in service after September 27, 2017 through 2022. Furthermore, it extends the definition of qualified property to include used, as well as new, property.
Beginning in 2023, 100 percent bonus depreciation is gradually phased out over four years. After 2026, bonus depreciation is no longer available at all, unless it is extended again by a new act of Congress.
Just imagine how these twin tax breaks can be combined for the benefit of a small business. Say a company has $2 million of net taxable income a year. In 2019, it acquires and places in service equipment costing $1.5 million. Due to the Secton179 and bonus depreciation provisions, the entire cost is currently deductible.
And here’s some icing on the cake: In the event there is any excess amount, the remainder can be depreciated under the regular rules, using the Modified Accelerated Cost Recovery System (MACRS). With MACRS, deductions are typically claimed over five, seven or 15 year periods.
Finally, there are no time restraints during the year for placing property in service. It can be early in the year, during the middle or late. The taxpayer still receives the full benefit of the Section 179 and bonus depreciation deductions.
Don’t let your business clients miss out on this double-barreled opportunity. Of course, they should acquire business property as needed, but be aware of the huge tax discount.
Next week we discuss the impact on the Section 199A Deduction