BP Blogs

LIKE WHAT YOU READ? Share this article :

Tax Reform Changes on Section 179 Depreciation and Bonus Depreciation

|

Tax Law Changes – Brief Highlight Series, Volume 1

Editor’s note: The tax reform recently passed is complex, and each situation is unique. The following blog posting is a high-level comparison of common depreciation topics under the 2017 law (2017 returns are filed in 2018), and the new law, which went into effect January 1, 2018, (2018 returns will be filed in 2019). For additional information, please contact your BP professional, or visit our website for our white paper on “The Effects of Tax Reform.”

********

The tax reform legislation effective 1/1/18, commonly known as the “Tax Cuts and Jobs Act,” has introduced big changes in depreciation rules for Section 179 and bonus depreciation that should be beneficial for the vast majority of businesses. If you haven’t been able to take advantage of section 179/bonus deprecation rules in prior years, with the expanded group of qualifying assets, the new rules may now be applicable to your situation.

Section 179

Section 179 deductions are used for qualifying assets placed into service during the tax year. For the 2017 tax year, eligible section 179 depreciation assets allow the taxpayer to expense up to the full cost of the asset and then claim an amount totaling up to $510,000 as an expense. This limit decreases, dollar for dollar, as eligible equipment placed in service exceeds $2,030,000 for the year.

Under the new tax law, effective 1/1/2018, the expense limit will nearly double to $1 million with the limit decreasing, dollar for dollar, after $2.5 million. The changes also expand the group of qualifying assets to include roofs, security systems, fire alarms and other improvements on eligible property.

Bonus Depreciation

Bonus depreciation is similar in that, as the title states, the taxpayer can take bonus depreciation on qualifying assets in the year they were acquired. Qualifying assets include property with a depreciation life under 20 years, computer software, and some utility property. Under the tax law in 2017, bonus depreciation was limited to 50% of the original cost of new assets.

The tax reform bill changed this, allowing taxpayers to expense 100% of eligible property, which now has been expanded to include used equipment. This allowance will begin to phase out, incrementally, at 20% per year beginning in 2023 through 2026, meaning that bonus depreciation is scheduled to be eliminated after 2027. You could start seeing these increased benefits sooner than you thought, as these changes have been made retroactive as of 9/27/2017. This means that if you placed eligible items in use after this date and before 12/31/17, you can take advantage of 100% bonus depreciation in the 2017 tax year.