Experienced Small Business Accountant - The Tax Cuts and Jobs Act, signed Dec. 22, 2017, changed some laws
regarding depreciation deductions.
Businesses can immediately expense more under
the new law
A taxpayer
may elect to expense the cost of any section 179 property and deduct it in the
year the property is placed in service. The new law increased the maximum
deduction from $500,000 to $1 million. It also increased the phase-out
threshold from $2 million to $2.5 million.
The new
law also expands the definition of section 179 property to allow the taxpayer
to elect to include the following improvements made to nonresidential real
property after the date when the property was first placed in service:
·
Qualified improvement property, which means any
improvement to a building’s interior. Improvements do not qualify if they are
attributable to:
o the
enlargement of the building,
o any
elevator or escalator or
o the
internal structural framework of the building.
·
Roofs, HVAC, fire protection systems, alarm
systems and security systems.
These
changes apply to property placed in service in taxable years beginning after
Dec. 31, 2017.
Temporary 100 percent expensing for certain
business assets (first-year bonus depreciation)
The new
law increases the bonus depreciation percentage from 50 percent to 100 percent
for qualified property acquired and placed in service after Sept. 27, 2017, and
before Jan. 1, 2023. The bonus depreciation percentage for qualified property
that a taxpayer 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.
The
definition of property eligible for 100 percent bonus depreciation was expanded
to include used qualified property acquired and placed in service after Sept.
27, 2017, if all the following factors apply:
·
The taxpayer didn’t use the property at any
time before acquiring it.
·
The taxpayer didn’t acquire the property from a
related party.
·
The taxpayer didn’t acquire the property from a
component member of a controlled group of corporations.
·
The taxpayer’s basis of the used property is
not figured in whole or in part by reference to the adjusted basis of the
property in the hands of the seller or transferor.
·
The taxpayer’s basis of the used property is
not figured under the provision for deciding basis of property acquired from a
decedent.
Also, the
cost of the used qualified property eligible for bonus depreciation doesn’t
include any carryover basis of the property, for example in a like-kind
exchange or involuntary conversion.
The new
law added qualified film, television and live theatrical productions as types
of qualified property that are eligible for 100 percent bonus depreciation.
This provision applies to property acquired and placed in service after Sept.
27, 2017.
Under the
new law, certain types of property are not eligible for bonus depreciation. One
such exclusion from qualified property is for 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 or
·
Transportation of gas or steam by pipeline.
This
exclusion applies if the rates for the furnishing or sale have to be approved
by a federal, state or local government agency, a public service or public
utility commission, or an electric cooperative.
The new
law also adds an exclusion for any property used in a trade or business that
has floor-plan financing. Floor-plan financing is secured by motor vehicle
inventory that a business sells or leases to retail customers.
Changes
to depreciation limitations on luxury automobiles and personal use property
The new
law changed depreciation limits for passenger vehicles placed in service after
Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the greatest
allowable depreciation deduction is:
·
$10,000 for the first year,
·
$16,000 for the second year,
·
$9,600 for the third year, and
·
$5,760 for each later taxable year in the
recovery period.
If a
taxpayer claims 100 percent bonus depreciation, the greatest allowable
depreciation deduction is:
·
$18,000 for the first year,
·
$16,000 for the second year,
·
$9,600 for the third year, and
·
$5,760 for each later taxable year in the
recovery period.
The new
law also removes computer or peripheral equipment from the definition of listed
property. This change applies to property placed in service after Dec. 31,
2017.
Changes to treatment of certain farm property
The new
law shortens the recovery period for machinery and equipment used in a farming
business from seven to five years. This excludes grain bins, cotton ginning
assets, fences or other land improvements. The original use of the property
must occur after Dec. 31, 2017. This recovery period is effective for property
placed in service after Dec. 31, 2017.
Also,
property used in a farming business and placed in service after Dec. 31, 2017,
is not required to use the 150 percent declining balance method. However, if
the property is 15-year or 20-year property, the taxpayer should continue to
use the 150 percent declining balance method.
Applicable recovery period for real property
The new
law keeps the general recovery periods of 39 years for nonresidential real
property and 27.5 years for residential rental property. But, the new law
changes the alternative depreciation system recovery period for residential
rental property from 40 years to 30 years. Qualified leasehold improvement
property, qualified restaurant property and qualified retail improvement
property are no longer separately defined and given a special 15-year recovery
period under the new law.
These
changes affect property placed in service after Dec. 31, 2017.
Under the
new law, a real property trade or business electing out of the interest
deduction limit must use the alternative depreciation system to depreciate any
of its nonresidential real property, residential rental property, and qualified
improvement property. This change applies to taxable years beginning after Dec.
31, 2017.
Use of alternative depreciation system for
farming businesses
Farming
businesses that elect out of the interest deduction limit must use the
alternative depreciation system to depreciate any property with a recovery
period of 10 years or more, such as single purpose agricultural or
horticultural structures, trees or vines bearing fruit or nuts, farm buildings
and certain land improvements. This provision applies to taxable years
beginning after Dec. 31, 2017.
If you would
like to discuss how these changes affect your particular situation, and any
planning moves you should consider in light of them, please give me a call.
Amare Berhie, Senior Accountant
(651) 300-4777
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