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Tax Reform Series: Depreciation Changes for 2018

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The December 22 Tax Cuts and Jobs Act contained major tax changes and reform affecting both businesses and individuals.

For Berntson Porter’s White Paper on the full impact of the new tax legislation, click here.

The Tax Cuts and Jobs Act provides a huge tax benefit to taxpayers investing in capital assets.

Bonus depreciation and Internal Revenue Code Section 179 expensing both receive a significant boost from the Tax Cuts and Jobs Act (TCJA). The TCJA allows for 100% bonus depreciation and doubles the amount eligible to expense under Section 179.

Bonus Depreciation

Under prior law, taxpayers could take a 50% bonus depreciation deduction on purchases of qualifying property, which included new tangible personal property, as well as land improvements and tenant improvements with a 15-year depreciable life. The TCJA now allows taxpayers to deduct 100% of the cost of qualifying property regardless of whether the property is purchased new or used. The property cannot be acquired from a related party, nor can it have been leased or used in the business at any point prior to acquisition. Under the new law, 100% bonus depreciation will be available for assets acquired and placed in service after September 27, 2017 through December 31, 2022. This is one of the few provisions of the TCJA that is retroactive to 2017. The bonus depreciation deduction will then be reduced annually beginning by 20% until it is fully phased out as of January 1, 2027.

Section 179

Under prior law, taxpayers could annually expense the full cost of qualifying property purchases up to $500,000, to the extent of their net business income. This $500,000 limit was reduced dollar for dollar once qualifying property purchases exceeded $2,000,000 in a given year. The TCJA increased the annual amount eligible for Section 179 expense to $1,000,000 for tax years after 2017. The threshold for the dollar for dollar phase-out also increased from $2,000,000 to $2,500,000. These new limits will be adjusted annually for inflation.

The TCJA also expanded what property qualifies for Section 179 expense to include certain items pertaining to non-residential real property. The cost of non-structural interior improvements made subsequent to the property’s initial placed in service date, roofs, HVAC, fire protection and fire alarm systems, and security systems are now eligible for Section 179 expense. Additionally, the cost of tangible personal property used in connection with furnishing lodging qualifies for 179 expense under the TCJA.

Vehicle Depreciation

Passenger Vehicles: Under prior law, depreciation on passenger vehicles with a Gross Vehicle Weight Rating (GWVR) of 6,000 pounds or less was restricted to the annual limits listed below:

  • Year 1: $3,160
  • Year 2: $5,100
  • Year 3: $3,050
  • Years 4 +: $1,875

These restrictions were relaxed by the TCJA so that passenger vehicles purchased after December 31, 2017 will be subject to the following annual depreciation limits:

  • Year 1: $10,000
  • Year 2: $16,000
  • Year 3: $9,600
  • Years 4+: $5,760

SUVs: Under prior law, SUVs with a GWVR over 6,000 pounds were eligible for up to $25,000 of Section 179 expense as well as 50% bonus depreciation on the balance of the purchase price. The residual amount would then be subject to the regular depreciation rules.

The TCJA retains the $25,000 limit for Section 179 expense. However, SUVs with a GWVR over 6,000 pounds are now eligible for 100% bonus depreciation, allowing you to immediately expense the full cost of the SUV in the year of purchase.

Trucks: Under prior law, trucks with a GWVR over 6,000 pounds and a cargo bed of at least 6 feet in length were not subject to any specific depreciation restrictions. This remains unchanged under the TCJA.

Your team at Berntson Porter looks forward to working with you on this historic change to our tax system. If you have any questions, please contact your tax professional at Berntson Porter & Company, PLLC at 425-454-7990.