Tax Year 2018 TCJA: Depreciation: Sections 168 and 179 Modifications

Experienced Tax Accountant – Temporary 100 Percent Expensing (Bonus Depreciation) The law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before September 28, 2017, and placed in service before January 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 September 27, 2017, if all the following factors apply:

• The taxpayer or its predecessor 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 purchased is not figured in whole or in part by reference to the seller or transferor adjusted basis.
• 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 property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).

The law added qualified film, television and live theatrical productions as types of qualified property that may be eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after Sept. 27, 2017.

Under the TCJA, certain types of property are not eligible for bonus depreciation in any taxable year beginning after December 31, 2017.

The law also eliminated qualified improvement property placed in service after December 31, 2017 as a specific category of qualified property.

Expensing Depreciable Business Assets (Section 179)

Businesses can immediately expense more of their business assets under TCJA. A taxpayer may still elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The TCJA increased the maximum deduction from $500,000 to $1million. It also increased the amount at which the deduction begins to phase out from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.

TCJA modifies the definition of section 179 property to allow taxpayers to elect to include certain improvements made to nonresidential real property, including most improvement to a building’s interior, plus roofs and systems for heating, air conditioning, security and fire protection.

Depreciation Limitations on Luxury Automobiles and Personal Use Property

The TCJA changed depreciation limits for passenger vehicles placed in service after December 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 TCJA also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after December 31, 2017.

Applicable Recovery Period for Real Property

The general depreciation system recovery periods are still 39 years for nonresidential real property and 27.5 years for residential rental property. The alternative depreciation system recovery period for nonresidential real property is still 40 years. However, the TCJA 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 no longer have a 15-year recovery period under the TCJA.

These changes affect property placed in service after December 31, 2017.

Additionally, a real property trade or business that elects out of the business interest deduction limit must use the alternative depreciation system to depreciate nonresidential real property, residential rental property, and qualified improvement property. This change applies to taxable years beginning after December 31, 2017.

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Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

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