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SPOTLIGHT ON TAX REFORM – BONUS DEPRECIATION AND FULL EXPENSING

February 13, 2018 Uncategorized Comments Off on SPOTLIGHT ON TAX REFORM – BONUS DEPRECIATION AND FULL EXPENSING

SPOTLIGHT ON TAX REFORM

 

 This is the first in a new series of articles we will be sending you addressing several major areas of Tax Reform. Newburg & Company LLP’s SPOTLIGHT ON TAX REFORM articles take a deeper dive into certain sections of Tax Reform to help unravel some of the intricacies.

 Section 179 and Bonus Depreciation

SNAPSHOT OF DEPRECIATION CHANGES:

    • Code Sec 179- election to “expense” qualifying property (new and used- placed in service)
      • For property placed in service after December 31, 2017, the maximum amount that may be expensed is $1 million (up from $500k).
      • Non-residential improvements for roofs, heating, ventilation, and air conditioning are now allowed under Section179.
      • Phase-out of this threshold is increased to $2.5 million of qualifying property placed in service.
    • First Year Bonus Depreciation is now 100% deductible (formerly 50%) for qualified property in service after September 27, 2017 (and before Jan 1, 2023) – phase down by 20% each year thereafter.
      • Now allowed for NEW and USED (formerly only NEW property qualified) – Bill removes the requirement of “original use of qualified property with the taxpayer” .
      • The definition of “Qualified Improvement Property” eligible for Bonus Depreciation has been simplified by Tax Reform. See below for additional details.
      • NOTE: Many states do not allow bonus depreciation (e.g. Massachusetts). Hence Section 179 approach is often preferred. Also note that only Bonus Depreciation can drive a company loss.
  • Luxury Auto Depreciation Limits Increased

 

    • Annual caps on luxury auto depreciation limits have nearly tripled.
    • For the first year the vehicle is in service $3,160 to $10,000
    • Second year $5,100 to $16,000
    • Third year $3,050 to $9,600
    • Annual thereafter $1,875 to $5,760

BONUS DEPRECIATION & FULL EXPENSING:

The most impactful change in depreciation deductions is the idea of “full expensing.” Before TCJA, taxpayers received a bonus depreciation deduction limited to a percentage (at the highest, 50%) of the acquisition cost of new, qualifying assets in the year of purchase. But now, full expensing is allowed.

The bonus depreciation deduction limitation has been raised from 50% to 100%. Further, the deduction can now be claimed with the acquisition of both new and used assets. Bonus depreciation requires the asset to first be capitalized and then depreciated and is only available for property which meets the definition of “Qualified Improvement Property.” Fortunately, Tax Reform simplified the definition of “Qualified Improvement Property.”

Definition of “Qualified Improvement Property” from Section 168(e)(6):

  • Any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.
  • The following types of improvements are not included:
    • Enlargement of a building
    • Any elevators or escalators
    • Internal structural framework of a building

The definition generally includes any property with a useful life of 20 years or less.

For planning purposes, it is important to know that deductions on assets purchased after 2022 will be subject to phase-out limitations.

The new law also allows the election for 50% bonus depreciation in lieu of the 100% available, and repeals the election to claim prior year minimum tax credits in lieu of bonus depreciation.

SECTION 179

Tax Reform increased the maximum section 179 depreciation expense allowed from $510K to $1M and increased the phase-out threshold from $2.03M to $2.5M. Further, the definition of qualifying section 179 assets has been modified to exclude references to specific qualified property (such as leasehold, restaurant, and retail improvements) and instead references the new, all-encompassing and broad category of qualifying improvement property.

The new definition of property eligible for Section 179 expensing is included here:

  • Tangible personal property
  • Computer software (as defined under Section 197(3)(3)(B))
  • “Qualified Improvement Property” from Section 168(e)(6) – See definition above
  • Roofs, heating, ventilation, fire protection, alarms, security systems

The definition generally includes any property with a useful life of 20 years or less. Special rules and limits apply when taking Section 179 on automobiles.

CONCLUSION

The new tax reform relative to deprecation has expanded tax benefits to business owners providing more flexibility to accelerate depreciation and write-off new and used asset purchases as well as luxury vehicles. As noted above, the expansion of both bonus depreciation and section 179 may increase or accelerate the generation of NOLs. The election to use such deductions will depend on the specific context and whether or not the acceleration will generate an 80 percent limited NOL. Further, the expansion of “qualified” property may increase the desire of buyers to purchase assets as opposed to stock in scenarios where the result is a step up in tax basis based on purchase price which can then be immediately deducted. For the same reason, there may also be an increase in deemed asset sale elections under sections 336(e), 338(g), and 338(h)(10) in scenarios where the structure of the acquisition is a qualified stock disposition or purchase.

Disclaimer: Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Newburg & Company, LLP would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

 

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