Depreciation Changes under Tax Reform
The Tax Cuts and Jobs Act make substantial changes to the rules for bonus depreciation, Code Section 179 expensing deductions and regular depreciation deductions for property used in a business.
Property placed in service and acquired after September 27, 2017 100% bonus is allowed. Additionally, the post Sept. 27, 2017 property eligible for bonus depreciation can be new or used. The phase down of bonus depreciation will begin to take place in 2023, and be fully phased out in 2027.
Code Section 179 Expensing
In general, qualified property is defined as depreciable tangible personal property that is purchased for use in an active trade or business (not a rental property), including off the shelf computer software and qualified real property. The new law expands the definition of qualified real property to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. For tax years beginning after December 31, 2017 the Section 179 limits have been increased as follows:
Old Law New Law
Maximum amount eligible to expense $500,000 $1,000,000
Qualifying property phase down threshold $2,000,000 $2,500,000
Other rules for real property depreciation
Qualified improvement property (QIP), if placed in service after 2017, has a 15-year depreciation period (rather than the 39-year period that generally applies to non-residential buildings). QIP for the exterior of the building is eligible for section 179, but not bonus. If QIP is for the interior of the building (non-structural) it would qualify for both section 179 and bonus. Note that there is a glitch in the law that doesn’t state the 15-year recovery period for QIP, but it was listed as such in committee and conference reports and a technical correction is expected to address this, perhaps sometime in 2018.
- Qualified business income (QBI) is computed using the net income from the business and one of the limitations is the taxable income of the individual shareholder or partner, so coordination of depreciation methods and QBI deductions will be important.
- Coordination of increased section 179 and bonus depreciation will be key now that both deductions cover many of the same property types.
If you would like to discuss any of these items or would like additional information, please give us a call.
Andy Graf, CPA
Copeland Buhl & Company PLLP