New 2018 Capital Expense Rules

See Also: Depreciation Changes in Tax Cuts and Jobs Act
 

Here’s what you need to know about them:

 

Tool #1:  Section 179 Deduction

The new law increases the amount of business property purchases that you can expense each year under Section 179 to $1 million (from $500,000 previously). Normally, spending on business property (machines, computers, vehicles, software, office equipment, etc.) is capitalized and depreciated so that the tax benefit is spread out slowly over several years. Section 179 allows you to get the tax break immediately in the year the property is placed into service.

It’s important to note that certain states such as New Jersey do not follow federal regulations so the deduction at the state level may be significantly lower. – Rich Middleton, CPA

 

Tips for Section 179:

• There is an eligibility phaseout for Section 179 that ensures it’s only used by small businesses, but that was also raised to $2.5 million (from $2 million) by the new law. If you spend more than $2.5 million on business property in total during the year, your ability to use the $1 million Section 179 deduction is reduced dollar-for-dollar above that amount.

 

• Section 179 deductions can be used on both new and used equipment.

 

• Section 179 cannot generally be used on real estate or land purchases, but this changes somewhat under the new laws. You can now use Section 179 on property used to furnish lodging or in connection with furnishing lodging (such as rental real estate). It also includes improvements to nonresidential real estate assets such as roofs, heating and air conditioning, and alarm systems.

 

• You cannot deduct Section 179 expense if it creates a tax loss. Any excess expense would be carried over until there is enough income to offset it. — Julie Strohlein, CPA

 

• Special rules may limit the deduction for vehicle purchases. — Rich Middleton, CPA

 

Tool #2:  Bonus Depreciation

Bonus depreciation limits (also known as first-year bonus depreciation) are also improved under the new law, but for a limited time. Bonus depreciation is similar to Section 179 and allows you to immediately expense capital purchases rather than depreciating them over several years.

Similar to the section 179 deduction, state limitations may vary and significantly differ from the federal deduction. — Rich Middleton, CPA

Under the new law, first-year bonus depreciation increases to 100 percent of the qualified asset purchase price for the next five tax years (starting in 2018) and can now be applied to the expense of purchasing used property as well as new.

 

Tips for Bonus Depreciation:

• Bonus depreciation is typically used on short-lived capital investments (with a 20-year or less useful life) such as machinery, equipment and software.

 

• Bonus deprecation had been only for purchases of new equipment, but can now be applied to used equipment as long as you place it into service at your business during the tax year.

 

• The allowable bonus depreciation starts to decline after 2022. It falls to 80 percent in 2023, 60 percent in 2024, 40 percent in 2025 and 20 percent in 2026.

 

• Unlike Section 179, bonus depreciation can be taken by a taxpayer even if there is a taxable loss for the year. — Julie Strohlein, CPA

 

The tangible property regulations that came out a few years ago also help businesses. Under the de minimis election, a business can deduct the full cost of items which cost $2,500 or less without capitalizing them first and then choosing one of the available depreciation methods. — Julie Strohlein, CPA

Remember, though tax reform gives you expanded tools to accelerate depreciation, it may not benefit you to use them in every case. Sometimes it’s better to use the standard capitalization and depreciation tax treatment. These tax benefits do not change the amount a capital purchase can be expensed — only the timing. Calculating whether your business will benefit from these revamped expensing tools can get complicated, so give us a call if you need assistance.

 

Stay up-to-date on tax law change with our Tax Reform Resource Center →