The Tax Cuts and Jobs Act of 2017 had several favorable changes on deduction rules for cost of buying certain items and recording expenditures for business. Some of the changes include:
Section 179 deduction
You can opt to expense (immediately deduct) the cost of equipment and certain other property rather than depreciating it over the recovery period (e.g. 5 years, 7 years) set by law for the type of property.
For property placed in service starting on January 1, 2018, the maximum expense deduction for the year is $1 million (would have been $520,000 if the law hadn’t been changed). This dollar limit begins to phase out dollar for dollar once total purchases for the year exceed $2.5 million.
The dollar limit for purchasing a heavy SUV remains at $25,000
The $1 million, $2.5 million, and $25,000 limits will be adjusted annually for inflation after 2018.
Property that can be expensed now includes:
• Tangible personal property (e.g. furniture and appliances) used predominantly to furnish lodging or in connection with furnishing lodging.
• Improvements to nonresidential real property (e.g. roofs; heating, ventilation, and air-conditioning; fire protection and alarm systems; security systems).
Qualified improvement property – cost can also be written off over 15 years
Bonus depreciation is a first-year allowance that acts to accelerate depreciation. Under the new law, the percentage for property placed in service after September 27, 2017, and through 2022 is 100%, so full expensing is allowed for qualifying property. You can elect to use a 50% allowance for your first tax year ending after September 27, 2017. The 100% allowance will decline to 80% in 2023, 60% in 2024, 40%in 2025, and 20% in 2026, with none allowed after 2026. (Certain longer production property gets an extra year.)
Prior to the new law, bonus depreciation could only be claimed for new property. Under the new law, it can be claimed for both new and pre-owned property. Qualifying property now also includes qualified film, television, and live theatrical production costs.
Depreciation for the cost of buying a new car, light truck, or van for business is subject to an annual cap; there are exceptions for certain transport vehicles and vans and trucks unlikely to be used for personal purposes. The depreciation limit for 2017 is $3,160 for cars, or $11,160 if bonus depreciation is used, and $ 3,560 for light trucks and vans, or $11,560 if bonus depreciation is used. The new law increases the annual depreciation cap for vehicles placed in service in 2018:
• First year: $10,000 (or $18,000 if bonus depreciation is used).
• Second year: $16,000.
• Third year: $9,600.
• Succeeding years: $5,760.
Special rules for heavy SUVs. Passenger vehicles, including pickup trucks, with a gross vehicle weight of more than 6,000 pounds but no more than 14,000 pounds are not subject to the dollar limits on depreciation for other vehicles. Please note there is a $25,000 limit on expensing. Due to the 100% bonus depreciation rule, the full cost of such vehicle can be deducted in the year of purchase and placed in service.
As you can see from above, the new rules for deducting the cost of certain business property are not simple. Contact us to schedule a consultation session.