The Tax Cuts and Jobs Act effectively lowers the cost of acquiring capital assets by making substantial changes to the income tax rules for bonus depreciation and other “cost recovery” methods.
Under the old rules, in the year an asset was placed in service, taxpayers could deduct 50% of the cost of most new tangible property, other than buildings, and, with the exception of qualified improvement property, building improvements. The “50% bonus depreciation” was to be phased down to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and afterward.
The new tax law for property placed in service and acquired after Sept. 27, 2017 raised the 50% rate to 100%. Additionally, the property eligible for bonus depreciation can be new or used.
The 2018/2019/2020 phase down (above) does not apply to post-Sept 27, 2017 property. Instead, 100% depreciation is decreased to 80% for property placed in service in calendar year 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027 and afterward.
Code Sec. 179 expensing.
Before the law change, taxpayers could elect, on an asset-by-asset basis, to immediately deduct the entire cost of section 179 property up to an annual limit of $520,000. The annual limit was reduced by one dollar for every dollar that the cost of all section 179 property placed in service by the taxpayer during the tax year exceeded a $2,070,000.
The new law substitutes as the annual dollar expensing limit to $1 million (inflation-adjusted for tax years beginning after 2018) and $2.5 million as the phase down threshold (similarly inflation adjusted).
Under the old rules, section 179 property included tangible personal property as well as non-customized computer software. The only buildings or other non-production-process land improvements that qualified did so because the taxpayer elected to treat “qualified real property” as section 179 property, for purposes of both the dollar limit and the phase down threshold. Qualified real property included restaurant buildings and certain improvements to leased space, retail space and restaurant space.
For tax years beginning after 2017, those buildings and improvements are eliminated as types of qualified real property and there is substituted a far broader group of improvements made to any building other than a residential rental building: (1) any building improvement other than elevators, escalators, building enlargements or changes to internal structural framework, and (2) building components that are roofs; heating, ventilation and air conditioning property; fire protection and alarm systems; or security systems.
Also, for tax years beginning after 2017, items (for example, non-affixed appliances) used in connection with residential buildings (but not the buildings or improvements to them) are section 179 property.
Other rules for real property depreciation.
If placed in service after 2017, qualified improvement property, in addition to being eligible for bonus depreciation and being newly eligible as section 179 property, has a 15 year depreciation period (rather than the usual 39 year period for non-residential buildings).
Apartment buildings and other residential rental buildings placed in service after 2017 generally continue to be depreciated over a 27.5 period, but should the alternative depreciation system (ADS) apply to a building either under an election or because the building is subject to one of the conditions (for example, tax-exempt financing) that make ADS mandatory, the ADS depreciation period is 30 years instead of 40 years under the old rules.
For tax years beginning after 2017, if a taxpayer in a real property trade or business “elects out” of the new limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under the ADS.
The new law triples the annual dollar caps on depreciation (and Code Sec. 179 expensing) of passenger automobiles and small vans and trucks. With the extension of bonus depreciation, the maximum bonus allowance remains at $8,000 for eligible vehicles. This means for taxpayers claiming bonus depreciation on their vehicles, they may be able to deduct up to $18,000 ($10,000 regular depreciation cap + $8,000 bonus) in the year the vehicle is placed in service This first year cap is extended through 2026 (with no phase-down on bonus).
For items placed in service after 2017, the new law shortens the depreciation period for most farming equipment and machinery from seven to five years and allows many types of farm property to be depreciated under the 200% (instead of 150%) declining balance method.
For tax years beginning after 2017, if a taxpayer elects to not subject a farming business to the new limits on business interest deductions, the taxpayer must depreciate under the ADS the business’s buildings and other assets that have a depreciation period of 10 years or more.
Alternative minimum tax.
Property eligible for bonus depreciation continues to be exempt from the unfavorable depreciation adjustments that apply under the AMT. However, the corporate AMT has been repealed; accordingly the election that corporations could make to give up bonus and other accelerated depreciation for bonus-depreciation-eligible property in exchange for a refund of otherwise-deferred AMT credits was eliminated.
John Csargo, CPA, MBT, CFP®