Under the TCJA, eligible property acquired and placed in service after September 27, 2017, is eligible for 100% bonus depreciation. The Tax Cuts and Jobs Act allows full 100% expensing of short-lived capital investments, such as machinery and equipment, for five years, then a 20-percent phase-down schedule over the subsequent five. The write-off is allowed for qualified property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). The federal tax reform also eliminated the original use requirement and allows taxpayers to elect to apply 50% expensing for the first tax year ending after September 27, 2017.
Is Bonus Depreciation the Best Choice?
Tax reform liberalized the rules for bonus depreciation of business property. You may wonder if the changes mean that you should now use bonus depreciation rather than Section 179 expensing when writing off business assets. But some taxpayers may benefit more by expensing the property’s cost under Section 179 because it provides more flexibility in certain situations. The rules are complex.
Accelerating your bonus depreciation will defer tax which is generally beneficial to most taxpayers. Businesses can recover the costs of depreciable property more quickly by claiming additional the first-year bonus depreciation for qualified assets. If you are eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy.
In some cases, delaying deductions can be the best tax advice. If your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Even though your tax bill may be higher than if you had taken the bonus depreciation, by deferring this deduction you’ll preserve larger future deductions on the property. This approach may be more powerful since these deferred deductions save more tax in a year when you’re in a higher tax bracket.
Transition Rules for Self-Constructed Property
Under the new law, eligible property acquired and placed in service after September 27, 2017, is eligible for 100% bonus depreciation. However similar to the last time we had 100% bonus depreciation (9/9/10 to 12/31/11) transition rules and binding contract rules apply.
The largest area affected is self-constructed property. Past guidance provided a 10% test for determining when a self-constructed property was started. In that past guidance, however, a property could be separated as to when different components were installed.
Example: If the parking lot was installed prior to September 27, 2017, it would be under the new rule, but if the carpet was put in after September 27, 2017, date it would be subject to the new rules. This would be true even if the building was started well before the transition date.
The old rules have bonus depreciation at 50% in 2017 and 40% in 2018. Under the transition rules, if an asset is acquired prior to September 27, 2017, but placed in service in 2018, the property would be subject to the old 2018 bonus depreciation numbers of 40%.
Example: A self-constructed property that was started in March 2017 and is slated for completion in mid-2018. If the parking lot was installed in June 2017 it would be subject to the old rules. Since the property will not be finished until 2018, the parking lot would be placed in service in 2018 and subject to bonus depreciation of 40%. However, if the carpet is installed in December 2017, the carpet would be subject to the new rules and eligible for 100% bonus depreciation. This means that a building may have multiple assets with different bonus eligibility even if the building is placed in service in 2018 (or late 2017). It will be critical that any cost segregation analysis looks at the assets paid for prior to September 27, 2017, and those paid for after this date as part of the study.
Qualified Improvement Property
A new type of property was created under the PATH Act called Qualified Improvement Property (QIP). This type of property is non-structural improvements to the interior of a building placed in service after the building was originally placed in service. This type of property is bonus eligible with a 39-year depreciable life (15-years if it also qualified for Qualified Leasehold Improvement Property).
In order to simplify the code the new tax reform bill combined Qualified Restaurant Property, Qualified Retail Property and Qualified Leasehold Improvements into one category with a 15-year life Qualified Improvement Property. While it appears Congress intended to include the old QIP in the new 15-year category, the new law did not include assets included in the original QIP. The new property description uses the same name Qualified Improvement Property, as was used under the old rules so it can be confusing.
Unless a technical correction is issued this will eliminate the old “Qualified Improvement Property” from bonus eligible assets. Additionally, Qualified Restaurant Property that is also Qualified Improvement Property may be affected. While it is expected that this will be addressed in future guidance the confusion remains until more information is issued.
With the added confusion from this law change, it is more important than ever to work with your tax professional to ensure accurate handling of depreciation moving forward.
Should I take the bonus depreciation on my tax return?
If you are unsure whether you should take the bonus depreciation on your tax return or you have questions about other depreciation-related breaks, such as Section 179 expensing, contact your tax advisor. LBMC’s Tax team will examine both options when preparing your return to ensure we choose the best option for your business.
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LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.