4 ways to boost depreciation
The new Tax Cuts and Jobs Act (TCJA) includes numerous tax incentives for businesses to grow and expand.
Strategy: Buy more business property. If qualified property is acquired and placed in service in 2018, you can benefit from enhanced “expensing” and other TCJA provisions relating to depreciation.
In fact, in many cases, you can write off the entire cost of business property placed in service this year—even if it costs seven figures!
Specifically, your business may cash in on these four tax breaks authorized by the TCJA, beginning in 2018.
1. Take Section 179 to the max. Under Section 179 of the tax code, your business can expense (i.e., currently deduct) the cost of qualified business property placed in service during the year, up to a maximum allowance. But the Section 179 deduction is subject to a phase-out above a specified threshold.
The TCJA permanently doubles the already-generous maximum allowance to $1 million, starting with tax years beginning in 2018 (adjusted for inflation in later years). What’s more, the phase-out threshold is increased to $2.5 million for tax years beginning in 2018 (adjusted for inflation in later years), effectively eliminating this concern for many small businesses.
Tip: The Section 179 allowance can’t exceed the amount of the taxpayer’s business taxable income.
2. Add a bonus depreciation deduction. Fear not if your company’s Section 179 deduction is limited as discussed above. Depending on your situation, “bonus depreciation” (also referred to as expensing by the lawmakers) may pick up the slack.
Prior to the TCJA, a business could already claim a 50% bonus depreciation deduction, in addition to the Section 179 allowance, forming a 1-2 combination that was hard to beat. But now bonus depreciation has been doubled to 100% for qualified property placed in service after Sept. 27, 2017, and by no later than Dec. 31, 2022. As a result, your business may be able to write off the full cost of property placed in service this year without even thinking about the Section 179 deduction rules.
Also, the definition of qualified property for this purpose is expanded to include used property. Unlike Section 179 property, bonus depreciation was limited to new property before the TCJA.
A business can continue to rely on 100% bonus depreciation for the next five years but then it is gradually phased out over the next five years.
After 2026, no bonus depreciation will be allowed, unless Congress changes its mind.
Tip: When it makes sense, a business can elect 50% bonus depreciation on a 2017 return for property placed in service after Sept. 27, 2017.
3. Drive in high tax style. Under the so-called “luxury car rules,” annual deductions for passenger vehicles used for business are subject to limits. Prior to the new law, these limits were pretty skimpy. For instance, for cars placed in service in 2017, the first-year deduction was limited to $3,160, based on 100% business use (plus $8,000 of bonus depreciation was allowed for a new vehicle). Thus, for a used car used 80% for business, the deduction limit was only $2,528 (80% of $3,160).
But the TCJA hikes the maximum deduction to $10,000 for the first year a car is placed in service—about three times the previous maximum allowance. Plus, bonus depreciation of $8,000 is allowed for both new and used vehicles (see box).
Tip: These changes may encourage business owners to buy a fleet of cars in 2018.
4. Make leasehold improvements. Normally, depreciation deductions for buildings must be stretched out over a lengthy 39-year cost recovery period. Under prior law, a faster 15-year cost recovery period was approved for qualified leasehold improvement property, qualified restaurant improvement property and qualified retail improvement property.
Now the TCJA consolidates certain provisions and establishes a 15-year cost recovery period for qualified improvement property.
Tip: These rules are expected to be clarified in a technical corrections act.
