The new Tax Cuts and Jobs Act (TCJA) includes numerous provisions designed to stimulate business growth, including changes in depreciation rules.
A business entity can now write off the entire cost of qualified property the year it is placed in service.
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The following four changes may benefit businesses of all shapes and sizes:
Under Section 179 of the tax code, a business can expense the cost of qualified property placed in service during the year. The TCJA doubles the expensing limit to $1 million and increases the phaseout threshold to $2.5 million. (Note: The maximum Section 179 deduction can’t exceed the amount of business income.)
“The Section 179 deduction now applies to certain property used in rental activities as well as certain qualified real property components.” – Rich Middleton, CPA
“Not all states follow federal rules for Section 179 as some states have lower thresholds for Section 179. New Jersey, for example, only allows for up to $25,000 of Section 179 expense.” – Ren Cicalese III, CPA, MST
The TCJA also authorizes a 100 percent bonus depreciation write-off for the cost of qualified property, doubled from 50 percent. This change is effective for property placed in service after Sept. 27, 2017. In addition, the new law expands the definition of qualified property to include used property acquired and placed into service at your company. However, the 100 percent bonus depreciation deduction is temporary. It begins to phase out after five years and vanishes completely after 2026.
“A reminder that the changes in Section 179 expensing and bonus depreciation are federal provisions. Most states have lower expensing limits and may disallow bonus depreciation.” – Rich Middleton, CPA
“While bonus depreciation will clearly help reduce your federal taxes, keep in mind that most states don’t allow for it. New Jersey, for example, doesn’t follow the federal rules for bonus depreciation.” – Ren Cicalese III, CPA, MST
Generally, building improvements must be depreciated over a lengthy 39-year period. However, a faster 15-year write-off was previously permitted for qualified leasehold improvement property, qualified restaurant improvement property and qualified retail improvement property. The TCJA consolidates these provisions with the intent of providing a 15-year depreciation period for qualified improvement property.
Luxury car rules limit the annual deductions a business can claim for business vehicles. Fortunately, the TCJA increases the business vehicle tax deduction limits for 2018 and thereafter. For instance, the maximum first-year deduction limit for a passenger car is multiplied by more than three, to $10,000 from $3,160. Plus, the vehicle may be eligible for an $8,000 bonus depreciation allowance.
“If you drive a vehicle weighing more than 6,000 pounds then there are no limits on how much you can depreciate in a year. You could potentially write off the entire cost of a large vehicle using Section 179 if it qualifies.” – Ren Cicalese III, CPA, MST
“These expense increases may make a vehicle purchase more attractive than a lease. Consider a quantitative analysis of the lease/buy alternative to maximize your deduction.” – Rich Middleton, CPA
We can help you learn more about these depreciation tax breaks and how they affect your situation. Give us a call today.
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