This is the time to buy new property for your business! Since the enactment of the Tax Cuts and Jobs Act (TCJA, December 2017), new limitations were drawn for both bonus depreciation and §179 property deductions. Both of these changes dramatically increase the amount of depreciation deduction taxpayers can take on property placed in service during the tax year.
To start off, let’s discuss the ramifications behind the new bonus depreciation. Before the TCJA was passed, all qualified property placed in service during the year was eligible for 50% bonus depreciation. This qualified property had to be deemed “original use” (or brand new) by the taxpayer in order to claim the deduction. This rule still holds true for any qualified property that is acquired before Sept. 28, 2017 (even if the property is placed in service after Sept. 27, 2017, see chart below).
Under the new law, qualified property that is acquired AND placed in service after September 27, 2017 and before January 1, 2023 is eligible for an increased 100% bonus depreciation. On top of this gift, the new law allows 100% bonus depreciation on qualified property that is either new or used. The new category of qualified property includes: (1) MACRS property – used or new – with a recovery period of 20 years or less (e.g., machinery, equipment, furniture); (2) depreciable computer software; and (3) qualified film, television, and live theatrical productions. In addition, it is anticipated that qualified improvement property (QIP) will qualify for bonus depreciation as that was the original intent, however due to legislative oversight, QIP is currently left out of bonus. It is expected there will be a technical correction to add QIP to bonus. QIP means any improvement made to a non-residential building excluding building enlargements, elevators, escalators, or internal structure/framework improvements to a building.
As a note, qualified property does not include: (1) carryover basis of used property from a like-kind exchange; (2) property used in the trade or business in providing certain utilities; and (3) property used in a trade or business that has floor-plan financing.
However, with all of this good news, there is some not-so-good news. The 100% bonus depreciation won’t last forever; in fact, starting in 2023, all qualified property placed in service is eligible for 80% bonus depreciation; in 2024, the rate decreases to 60%, and it continues to decrease by 20% each year thereafter until 2027 when it reaches 0%.
To sum up the changes in bonus depreciation, please refer to the following charts:
§179 Property Deductions
The second part of this historic change for depreciation is found in §179 deductions. Before the TCJA, taxpayers could expense up to $500,000 of property cost under I.R.C. §179 as long as the cost is under the $2 million threshold.
With the new law, taxpayers now have an increased limit of expensing $1 million with a $2.5 million phase-out threshold. The TCJA also expanded the category of §179 property to allow for more property. Included in this expansion is qualified improvement property (or any improvement made to a building’s interior), roofs, HVAC, fire protection systems, alarm systems, and security systems. Keep in mind that these changes apply to property placed into service in years beginning after Dec. 31, 2017.
Due to these two big changes, taxpayers have a lot to think about. Both changes, however, will greatly impact the amount of property that is placed into service by taxpayers in the next few years.