Dive into how depreciation was affected by tax reform

January 31, 2018|Tiffany Piper

The recent Tax Cuts and Jobs Act (the act) has numerous changes to depreciation and the treatment of fixed assets that will impact many taxpayers. Many of the changes are beneficial to taxpayers and allow for immediate tax deductions. Although many of the provisions of the act start in 2018, there are some changes that will affect 2017 tax filings.

Below is a brief summary of some of these changes, along with charts showing the comparison of 2017 to 2018. Dates that refer to tax years are indicated as such. All other dates are calendar-year dates.

Bonus depreciation

Bonus depreciation, which has been available for a number of years, allows you to take a first-year depreciation deduction on qualified depreciable property. Prior to the act, bonus depreciation was 50% for assets placed in service in 2017 and was scheduled to phase-out and decrease to 40% in 2018. The main qualifications for bonus depreciation was that the property had to be new (original user) and have a recovery life of 20 years or less.

The act made two significant changes to bonus depreciation. First, it increased bonus depreciation to 100% for assets acquired and placed in service after September 27, 2017. The second change is that the original use requirement has been eliminated after September 27, 2017, which means bonus now can be claimed on new and used assets. While used assets qualify, you cannot have used the asset (such as leasing) before purchasing the asset. You do have the option of electing not to take bonus in any year.

Bonus depreciation Assets acquired and placed in service Jan. 1, 2017 – Sept. 27, 2017 Assets acquired and placed in service Sept. 28, 2017 – Dec. 31, 2017 Assets acquired and placed in service in 2018
First-year deduction 50% 100% 100%
Original use requirement Only new assets New and used assets New and used assets

Section 179

Section 179 allows you to elect to deduct the cost of certain qualifying property that otherwise would be depreciated. Unlike bonus depreciation, section 179 has more limitations that must be applied. The amount of section 179 that can be elected each tax year is subject to an annual limit, which will be phased down if total property acquired during the year exceeds the annual threshold. The amount of section 179 taken on your return is also limited by taxable income. For the 2018 tax year, the new tax law significantly increased the annual deduction as reflected below.

Section 179 2017 tax year 2018 tax year
Annual deduction $510,000 $1 million
Property threshold $2.03 million $2.5 million

The act expanded the definition of qualifying property eligible for section 179. The addition to qualifying property includes:

  • Qualified real property
    • Qualified improvement property (discussed below)
    • Following improvements to nonresidential real property:
      • Roofs
      • HVAC property
      • Fire protection and alarm systems
      • Security systems
  • Personal property used with the furnishings of rental properties

Qualified improvement property

The act simplifies previous categories of building improvement property. Starting with assets placed in service January 1, 2018, there will be one category known as qualified improvement property (QIP). QIP is defined as any improvement made to an interior portion of a nonresidential building after the date the building was first placed in service. QIP excludes an enlargement to a building, elevators and escalators, and costs attributable to the internal structural framework of a building.

QIP is depreciated over a 15-year life* and is eligible for both bonus depreciation and section 179. This is a significant change as this property was formerly depreciated over 39 years. With the option of bonus depreciation and section 179, a building improvement once taken over 39 years can now be fully written off in the year of the improvement.

*Note: The final bill, according to the Conference Report on H.R. 1, sets a 15-year life for QIP. However, the language in the act inadvertently omitted this language. It has been specified that this will be addressed in future technical corrections, but the timing of these corrections is unknown at this time.

Vehicle depreciation

Passenger automobiles and certain smaller SUVs and trucks have always been subject to annual depreciation limits which made it practically impossible to ever fully depreciate the cost of a vehicle. The act has increased the annual depreciation caps for these types of vehicles as shown below. These new higher limits will now allow you to write off substantially more for these types of vehicles than in the past.

Annual depreciation limits for luxury automobiles For business vehicles placed in service in:
2017 (New auto) 2017 (Used auto) 2018 (Bonus) 2018 (Elect out of bonus)
1st year $11,160 $3,160 $18,000 $10,000
2nd year $5,100 $5,100 $16,000 $16,000
3rd year $3,050 $3,050 $9,600 $9,600
All years thereafter $1,875 $1,875 $5,760 $5,760

Like-kind exchanges

Previous law allowed taxpayers to defer gains when they exchanged like-kind business property. Property eligible for this tax-free exchange included both real and personal property. So, in other words, a building could be exchanged for another building or a vehicle could be exchanged for another vehicle (assuming all business-use property).

The act has modified the rule on like-kind exchanges and now eliminates the ability to exchange personal property starting with transactions January 1, 2018, and after. The main reason for this change is that Congress felt the act already provided increased benefits for personal property with respect to bonus depreciation and section 179.

263(a) repair regulations and depreciation

The above discussion on bonus depreciation, section 179 and qualified improvement property is for assets that are capitalized and depreciated, after applying the 263(a) repair regulations. The repair regulations can help minimize the dollar amount of assets that need to be capitalized and depreciated, minimize depreciation recapture and maximize repair expenses.

The above summary touches on a small portion of the 2017 Tax Cuts and Jobs Act. With the significant changes to the tax law, it is important to consider how they will impact you and your business. Many of the depreciation changes will provide relief for taxpayers and you should consult your tax advisor to ensure you are maximizing the benefits.

If you have any questions on changes to depreciation and how it might affect your tax strategy, please contact your Schenck representative or a member of Schenck’s Tax team at 800-236-2246.

Tiffany Piper, CPA, is a manager with nearly 20 years of public accounting experience, including tax planning, compliance and business consulting for closely held businesses and individuals. Tiffany also has a strong background in the preparation of corporate and individual tax returns, including multi-state returns.

Tags: Tax