The Differences Between the Bonus and the 179 Depreciation
In this segment, Carolyn Dolci—partner and leader in EisnerAmper’s Law Firm Services Group—discusses tax reform within professional services firms and how the 2017 Tax Cuts and Jobs Act will impact bonus depreciation.
Dave Plaskow: Hello and welcome to EisnerAmper’s professional services podcast series, where we try to dig a little deeper into those topics that matter most to you following the 2017 Tax Cuts and Jobs Acts, also known as tax reform.
In this episode we’re covering what professional services firms need to know now related to depreciation – bonus depreciation and Section 179. I’m Dave Plaskow and with me today is Carolyn Dolci, Tax Partner and leader in EisnerAmper’s Professional Services Group. Carolyn, welcome and thanks for being here.
Carolyn Dolci: I’m happy to be here, Dave.
DP: Now that we’ve had a little bit of time to let the dust settle on tax reform – keep in mind that dust is still settling – could you give us a little insight on the new rules related to bonus depreciation and Section 179?
CD: Absolutely. We’ve been fielding a number of questions in this area for the past few weeks.
DP:I would imagine so. What do our listeners need to know?
CD:Let’s talk about bonus depreciation first.
CD:What bonus depreciation does, it allows you to expense a percentage of your fixed assets in the year of purchase. Now this is different than regular depreciation, when you have to take the asset and write it off over the tax life.
CD:What the act does, it extends bonus depreciation through December 31 of 2026.
CD:For assets placed in service from September 27 of 2017 to December 31 of 2022, you get 100% bonus depreciation deduction. It goes down to 80% in ’23; 60% in ’24; 40% in ’25; and 20% in ’26. For assets placed in service in the period September 27 of ’17 through December 31 of ’17 a taxpayer can elect to use the old rules and only take 50% bonus depreciation instead of 100% depreciation.
CD:And what qualifies for this depreciation? Generally the same old law and the new law here – this is property with a recovery period of 20 years or less: computers, furniture and fixtures, equipment, leasehold improvements and computer software.
DP:What is the most significant change with respect to bonus depreciation?
CD:The act removes the original-use requirement. Now you can purchase property that is used property. Under the old rules, property had to be brand new and never used by anyone. The new rules changes this, and it can be used. If you have related companies, you can’t buy and sell between them and try to make this work. It has to be outside of that. This also will have a significant effect on M&A transactions and when the assets of a company are purchased.
DP:That seems like a pretty significant change that’ll last for several years to come.
DP: What advice would you give our listeners so that they can be proactive here?
CD:One thing to keep in mind with bonus depreciation is binding contract dates.
CD:Real property improvements take some time to get ready until they’re able to be used. If you have a binding contract date before September 27 of 2017, you need to follow the old bonus depreciation rules, which would mean that for 2017 you’re only going to get 50%, and possibly in ’18 it goes down to 40% - you’d be under old rules.
DP: Let’s switch gears a little bit and talk about the new rules for Section 179 deductions.
CD:Section 179 is similar in that you would expense the cost of your fixed asset purchase instead of depreciating it. The one thing that’s different with 179 from bonus depreciation is there’s a cap. You can only write off $1 million a year for assets that are placed in service on or after January 1 of 2018. There’s also a phase out when your qualified asset purchases reach $2.5 million and then it’s limited to taxable income, whereas bonus depreciation is not.
DP:Based on what we’ve talked about, is there a better choice here – bonus depreciation, Section 179? What’s the right way to go?
CD:Well, keep in mind that many states don’t allow bonus depreciation and with a qualified business income deduction there are some differences there. Most important is that every firm has to look at its own situation and ask, “Should we take bonus, should we take Section 179, should we take a combination or should we take a regular depreciation?” It really is a very specific and individualized choice for each firm.
DP:Carolyn, thank you for helping us with another piece of the puzzle that we call tax reform.
CD:Great. Thanks for giving me the opportunity.
DP:And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this, and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.
In this segment, Carolyn Dolci—partner and leader in EisnerAmper’s Law Firm Services Group—discusses what you need to know about expensing meals and entertainment under the 2017 Tax Cuts and Jobs Act.