Tax Reform: Depreciation

One of the few provisions in the Tax Cuts and Jobs Act that had retroactive application is the new depreciation rules. The new rules went into effect on assets placed into service after September 27, 2017 and allows 100% bonus depreciation on qualified asset purchases. Qualified asset purchases may be new or used property and have a useful life of 20 years or less. Used property is an added advantage to the new depreciation rules as this has not been the case in prior years. There is a caveat with this rule: The purchase order had to be placed on or after September 27, 2017. If there is a written, binding contract for the acquisition of the property prior to September 28, 2017, the property is not eligible for the 100% bonus rate. The 50% rate applies if the property was placed in service in 2017, 40% if placed in service in 2018 and 30% if placed in service in 2019. As the law is written, the new depreciation rules will be favorable until at least 2022.  After 2022 bonus depreciation is scaled back by 20% each year (e.g. 80% in 2023, 60% in 2024, etc.).

Currently, in the real estate realm, there is a technical error in the new law concerning qualified improvement property. Qualified improvement property is an improvement to the interior part of a nonresidential building and does not include the enlargement of the building, an elevator or escalator, a structural component that benefits a common area, or the internal structural framework of the building. Under prior law, qualified improvement property was defined as an exception to the 39-year recovery period. Qualified improvement property (e.g., leasehold improvements, etc.) was subject to 15-year MACRS and was eligible for bonus and Section 179 expensing. The new tax law eliminates the separate definition of qualified improvement property and those favorable tax treatments were removed along with it. Hopefully a technical correction will be issued to correct this oversight.

In 2017, Section 179 expensing was limited to $510,000 and phased out dollar-for-dollar once you hit $2,030,000 of qualified purchases. For 2018, Section 179 expensing saw an increase up to $1,000,000. Section 179’s limitation in 2018 will now phase out dollar-for-dollar once you hit $2,500,000 of qualified purchases.

My take away: Now may be the best time to acquire fixed assets for your business and take full advantage of expensing on qualified asset additions. As always, circumstances may apply to your situation; it is best to consult your tax advisor.