The Tax Cuts and Jobs Act enacted at the end of 2017 brought forth many changes to the tax law that the industry knew and operated by for 30+ years. Though there are many topics the TCJA addressed, one particularly hot topic that saw significant changes was depreciation. The new depreciation legislation is effective from 2018 – 2026, and while there are many technical depreciation topics that can be addressed, we’ve narrowed it down to these top four:
1. Section 179 Depreciation
- The immediate write off tangible personal property
- Maximum deduction of $1,000,000
- Phase-out calculation kicks in when current year acquisitions are greater than $2,500,000
- Must have taxable income to take advantage of the deduction
Section 179 depreciation can be utilized on equipment, furniture & fixtures, qualified improvement property, and certain improvements to nonresidential real property (think roofs, HVAC, security systems, etc.). Do note that a taxpayer must have taxable income in order to deduct section 179 depreciation, and the deduction may not generate a taxable loss.
2. Bonus Depreciation
- The immediate write off property with a depreciable life of 20 years or less
- The write off is 100% of the asset costs. That is not a typo.
- Used property now qualifies for bonus depreciation deductions
- No requirement to have taxable income
Yes, you read that right. The TCJA increased the bonus depreciation deduction from 50% to 100% and will be effective until 2022. After that, the allowable bonus depreciation deduction will decrease by 20% each year until fully phased out in 2027.
3. Building Improvements
- The 15-year depreciable life and bonus depreciation were accidentally repealed for building improvements when the new category of qualified improvement property replaced qualified leasehold improvement, retail improvement, and restaurant improvement property
- 39-year life now applies for building improvements; no bonus depreciation
- Qualified improvement property is still eligible for section 179 depreciation
- Efforts are moving forward to issue a technical correction regarding the accidental repeal of 15-year life and bonus depreciation, but to date one has not been finalized and issued
A wording oversight in the depreciation legislation of the TCJA has caused a hiccup in the plans for many taxpayers (and their CPAs) for 2018 tax returns. However, we are hopeful that a technical correction will be issued and applied retroactively to smooth out the kinks and bring back the benefits of 15-year life/bonus depreciation eligibility for qualified real property and building improvements.
4. Like-Kind Exchanges
- Section 1031 gain on sale deferral; applicable when selling qualified property and buying qualified replacement property
- Limited to real property (buildings and land)
- Vehicle and equipment trade-ins no longer qualify for deferred gain treatment
Vehicle trade-ins have been a huge hit in the past and many taxpayers have reaped the benefits of a like-kind exchange. While these trade-ins no longer qualify for gain deferral, the sale and purchase of replacement real property is still applicable and still a significant tax incentive.
All in all, the TCJA as it relates to depreciation brought forth favorable changes for the next few years. If you would like more information on the depreciation topics discussed, please contact your ATKG accounting professional.
Brian Beverley is a Director at ATKG. He is a Certified Public Accountant and received his Bachelor of Business Administration in Accounting from The University of Texas at San Antonio. Brian can be reached at 210.733.6611 or via email at firstname.lastname@example.org.