Capital Expense and Depreciation Changes

​The Tax Cuts and Jobs Act (“TCJA”) signed by the President in December brought about favorable changes for taxpayers when it comes to recovering their costs of capital expenses for business purposes. Following is an outline of the changes with some tips and suggestions on how to maximize the benefit for taxpayers.

Bonus Depreciation

Before tax reform, taxpayers could deduct 50% of the cost of tangible personal property placed in service during the tax year, then apply accelerated depreciation to the remaining 50% of the cost. The new rules under tax reform increase the bonus depreciation to 100%, allowing for a full deduction in the year placed in service. This rule is effective for assets acquired and placed into service after September 27, 2017 (assuming no written binding contract for acquisition was in effect on September 27, 2017), providing an opportunity for taxpayers to maximize deductions in 2017 when their income is subject to a higher rate of tax.

In addition to allowing full expensing, the new rules expand eligible property to include used assets. Certain used assets, however, such as assets acquired from a related party or from an affiliated member of a controlled group, will not qualify as eligible property. Generally though this provision will be especially helpful for taxpayers acquiring capital-intensive businesses that are treated as asset acquisitions for tax purposes.

The full-expensing provision will eventually be phased out, but phase out does not begin until 2023 and decreases to 0% in 2027. As with prior bonus depreciation, taxpayers can elect out of the full expensing, and taxpayers in a loss situation may want to consider this option.

Section 179 Expense

Prior to tax reform, small taxpayers could elect to deduct the entire cost of certain property up to an annual limit of $500,000 (adjusted for inflation each year – in 2018, the amount would have been $520,000). This limit was subject to a phase-out for taxpayers exceeding a $2 million inflation-adjusted threshold.

Under tax reform, the new annual limit is $1 million (which will be inflation-adjusted after 2018), and the threshold amount for phase down is increased to $2.5 million, expanding the availability of §179 expensing to more taxpayers.

• Any building improvement other than elevators, escalators, building enlargements or changes to internal structural framework
• Roofs
• HVAC property
• Fire protection and alarm systems
• Security systems
• Some purchases used in residential buildings are included in the expanded definition of qualified property as well, including appliances and other personal property

Changes to Listed Property

Beginning for assets placed in service after 2017, “listed property” no longer includes computers and peripheral equipment, easing some reporting requirements and tax treatment of these items, in additional to making them eligible for §179 expensing.

Other Changes

• The TCJA triples the annual dollar caps on depreciation (and Code Sec. 179 expensing) of passenger automobiles and small vans and trucks. Also, because of the extension of bonus depreciation, the increase, for vehicles allowed bonus depreciation, of $8,000 in the otherwise-applicable first year cap is extended through 2026 (with no phase-down).
• Qualified improvement property placed in service after 2017 has a 39 year depreciation period rather than the intended 15 year period; unless a technical corrections bill is enacted QIP is not eligible for bonus depreciation. Consideration should be given to whether or not any of the improvements would qualify for §179 which now includes roofs, HVAC and some other real property as well.
• Apartment buildings and other residential rental buildings placed in service after 2017 generally continue to be depreciated over a 27.5 period, but should the alternative depreciation system (ADS) apply to a building either under an election or because the building is subject to one of the conditions (for example, foreign property) that make ADS mandatory, the ADS depreciation period is 30 years instead of the pre-TCJA 40 years.
• For tax years beginning after 2017, if a taxpayer in a real property trade or business “elects out” of the TCJA’s limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under the ADS.

This information is based on the statutes and guidance available as of the date of publication (January 2018) and is subject to change.