The Tax Cuts and Jobs Act (TCJA) contains many provisions which affect business and business owners. Some of these changes are specific to certain circumstances or types of business. The depreciation changes, however, may apply to all businesses.
The dictionary definition refers to an asset’s reduction in value due to the passage of time, particularly due to wear and tear. It is easy to think of some old, rusty equipment as being less valuable than brand-new equipment. Some assets, like real estate, may actually increase in value with the passage of time. When we speak about depreciation in terms of accounting and taxes, though, we are talking about the systematic expensing of the cost of a business asset. The law allows us to do this, even if the fair market value of the asset in question is not actually decreasing.
Congress often seeks to stimulate the economy by encouraging business owners to invest money back into their companies. The theory is that the new equipment or expanded operation will cause additional hiring, the new employees will have increased spending power, and the economy grows accordingly. This encouragement often comes in the form of tax laws that allow faster recovery of the costs of such investments.
Section 179 is a section in the tax code that allows an immediate tax deduction when an asset is purchased instead of capitalizing the asset and depreciating it over time. This code section has been around since 1958, but the details about what type of property qualifies or the amount of immediate deduction allowed have changed many times. Currently, under the TCJA, a business can expense up to $1,000,000 for qualifying property as long as the total amount of property purchased in the year is less than $2,500,000. This would seem to indicate that most small businesses who never purchase more than $2,500,000 in a given year will be able to expense every asset they buy. There are exceptions, however.
Although the types of property eligible for Section 179 have expanded under the TCJA, there are still some that don’t qualify. Most real property, such as land, buildings, elevators, land improvements, and structural components of buildings will not qualify, although there are a few exceptions. There are also limitations for many vehicles. Additionally, a business may not take Section 179 in excess of net profits. This means that if the expense would make the company show a net loss, Section 179 cannot be taken.
Additional Reading: New 2018 Capital Expense Rules
Much like Section 179, the bonus depreciation rules allow a business to take an immediate first-year deduction for the cost of eligible assets purchased. The bonus rules are found in Section 168 of the tax code, and these rules have also changed often over the years. Currently, under the TCJA, 100% of the purchase price of qualified assets may be expensed for property placed in service after September 27, 2017 and before January 1, 2023. After that, the rate gradually decreases each year.
Primarily, bonus depreciation may be taken regardless of net profit. This means a company may take bonus depreciation even if doing so causes a net loss for the year. Also, bonus depreciation is “automatic” unless a taxpayer makes an election out. The election must be made for all property in the same class, not on a specific asset by asset basis. For instance, a business would need to elect out of bonus depreciation for all of the five-year assets placed in service for the year.
The current tax law contains some of the most liberal and expanded expensing provisions we have ever known. Whether it will stimulate the economy and improve the fiscal health of our country is yet to be seen, but business owners have numerous options available to them. Please call our office if you would like to explore how these laws apply to your business.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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