Tax Reform: What it Means for Businesses – Depreciation
October 08, 2018

This week we summarize significant changes made to depreciation rules.

 

Section 179 Expensing

 

Section 179 of the Internal Revenue Code (IRC) allows small businesses to fully expense qualifying property purchases in the year of acquisition. Section 179 has been greatly enhanced under the new tax law.

 

Beginning in 2018, the annual expensing limit is increased from $500,000 to $1 million. The investment limitation also increases – from $2 million to $2.5 million. These increases are permanent and will be inflation-adjusted for tax years beginning after 2018.

 

The definition of real property that qualifies for Section 179 expensing is significantly expanded and now includes the following:

 

  1. Qualified improvement property – a non-structural improvement to the interior of a commercial building
  2. Roofs
  3. HVAC property
  4. Fire protection and alarm systems
  5. Security systems
  6. Personal property purchased for use in a residential rental building (e.g. furniture and appliances)

  

Bonus Depreciation

 

IRC Section 168(k) depreciation, more commonly known as bonus depreciation, is enhanced to allow for a 100% depreciation rate for eligible property through 2022. Under old law, the rate was 50%. Beginning in 2023, the bonus depreciation rate will gradually decrease to the following amounts:

 

  • 2023 – 80%
  • 2024 – 60%
  • 2025 – 40%
  • 2026 – 20%
  • 2027 – 0%

 

Property eligible for bonus depreciation includes new or used tangible personal property with a tax recovery period of 20 years or less. The new law expanded the definition to include used property.

 

With enhancements to bonus depreciation and Code Section 179, businesses will now have multiple options available for fully expensing business property purchases.

 

  

Farm Equipment

 

Purchases of new farming machinery and equipment may now be depreciated over 5 years instead of 7 years. Qualifying machinery and equipment does not include grain bins, cotton ginning assets, fences and other land improvements. Also, certain farming property is now eligible for the 200-percent declining balance depreciation method.

  

Vehicles

 

Annual depreciation caps on passenger automobiles have increased significantly. 2018 limits increase to:

 

  • Year 1: $10,000 ($18,000 if bonus depreciation claimed)
  • Year 2: $16,000
  • Year 3: $9,600
  • Years 4-6: $5,760

 

The depreciation caps listed above will be adjusted annually for inflation beginning in 2019. The $25,000 maximum Code Section 179 deduction limit for certain SUVs and trucks will also be adjusted for inflation beginning in 2019.

  

Real Property Recovery Periods

 

Qualified improvement property, defined above, is now intended to be eligible for a 15-year depreciation recovery period. Under old law, such property had to be depreciated over 39 years. It should be noted that a technical corrections bill will need to be passed by Congress to formally allow this change. A corrections bill is expected, but as of this writing Congress has yet to act.

 

The previous property classes for 15-year leasehold improvement property, retail improvement property and restaurant improvement property have been eliminated.

 

Have you purchased or do you have plans to purchase business property this year? Give BMM a call to discuss the tax implications.