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Tax Reform – Bonus Depreciation and Full Expensing

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 (dollar for dollar reduction).
    • First Year Bonus Depreciation is now 100% deductible (formerly 50%) for qualified property purchased and placed in service after September 27, 2017 (and before Jan 1, 2023) – phase down by 20% each year thereafter.
    • Now allowed for NEW and USED property (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.
    • Property purchased before September 28, 2017 but placed in service after September 27, 2017 will be subject to the old bonus limitations.
  • Luxury Auto Depreciation Limits Increased
    • Annual caps on luxury auto depreciation limits have nearly tripled:
    • First year limit – $10,000 (previously $3,160)
    • Second year limit – $16,000 (previously $5,100)
      • Third year limit – $9,600 (previously $3,050)
      • Annual limit thereafter – $5,760 (previously $1,875)

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.

 

QUALIFIED IMPROVEMENT PROPERTY:

The definition of Qualified Improvement Property has been adjusted under the TCJA.

Pre-TCJA:

  • Qualified Improvement Property was initially defined as: “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.”
  • Qualified Improvement Property was initially subject to a 39-year MACRS recovery period and eligible for bonus depreciation.
  • Separate from “Qualified Improvement Property” were three additional types of property, all subject to 15-year MACRS recovery periods (bonus eligible):
    • Qualified Leasehold Improvement Property
    • Qualified Retail Improvement Property
    • Qualified Restaurant Improvement Property

Post-TCJA:

  • The above three classes of Improvement Property (Leasehold, Retail and Restaurant) were eliminated and all Improvement Property will now be classified as “Qualified Improvement Property” going forward.
  • Congress intended for “Qualified Improvement Property” placed in service after 2017 to have a 15-year MACRS recovery period, which would make eligible for bonus depreciation (now 100%).
    • Due to a drafting error, the 15-year recovery period is not reflected in the statutory language of the TCJA, and therefore Qualified Improvement Property would therefore technically not be bonus eligible.
    • No technical correction has been passed by congress, therefore all Qualified Improvement Property placed in service after 2017 would essentially be deemed 39-year MACRS recovery period (until corrected).
    • We anticipate that Congress may choose to correct this in the coming weeks/months, as it does appear the intention was to include it as bonus eligibility.
  • Qualified Improvement Property is still eligible for Section 179 expensing.

The following types of improvements are not included:

    • Enlargement of a building
    • Any elevators or escalators
    • Internal structural framework of a building 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:
    • SECTION 179
    • 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.
  • 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 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.
  • CONCLUSION
  • 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.

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