Tax Services • Published 3/15/2018 Depreciation and Section 179 Changes with New Tax Law

On December 22, 2017, President Trump signed a historic bill (the “Tax Reform Bill”) that initiated sweeping tax changes for the first time in 30 years.  The bill imposes many changes for employers and business taxpayers alike.  One of the changes in the Tax Reform Bill is increased deductions for bonus depreciation and expensing under I.R.C. § 179. Your organization should start to become familiar with the potential affects these changes may have on your company.

Bonus Depreciation

Under the new law, there is 100% bonus depreciation for “qualified property” acquired and placed in service after September 27, 2017 and before January 1, 2023. The rates of bonus depreciation decline for tax years 2023-2026 as follows: 

Year	Bonus Depreciation for Assets
2023	80%
2024	60%
2025	40%
2026	20%

 “Qualified property” generally means property which has a recovery period of 20 years or less. The new law also added property that is a qualified film or television production or a qualified live theatrical production to the definition of "qualified property." Used property now qualifies for bonus depreciation.

The new legislation limits the use of bonus depreciation for the following businesses:

• Bonus depreciation is not allowed for property used in a trade or business that had floor plan financing indebtedness deducted as business interest.
• Real property trade or businesses that opt out of the business interest limitation are required to use the ADS recovery method.

Expensing under Section 179

I.R.C. § 179 allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. If you buy or lease a piece of equipment, this allows you to deduct the full purchase price from your gross income. Under the new tax law, the maximum expensing limits has increased from $520,000 to $1,000,000. The phase-out threshold was also increased from $2,070,00 to $2,500,000. This is the maximum amount that can be spent on equipment before the Section 179 deduction is reduced on a dollar for dollar basis.

• New 179 limits
  • Expense amount increased to $1,000,000
  • Phase-out threshold increased to $2,500,000
• Expanded application
  • Under the old law, section 179 property included, at the election of the taxpayer, “qualified real property.”
  • The new law expands the definition of “qualified real property” to include “qualified improvement property” as well as certain other improvements to nonresidential real property that normally do not qualify as “qualified improvement property” such as roofs, HVAC property, fire protection systems, and security systems.

Qualified Improvement Property

Prior to the passage of tax reform, there were several types of “improvement property”:

Improvement Properties	Depreciation Period
Qualified leasehold improvement property	15 year
Qualified retail improvement property	15 year
Qualified restaurant property	15 year
Qualified improvement property	39 year*

 *39-year depreciation period under PATH act, but it qualified for 50% bonus depreciation

Under the new law, all those types of properties were combined into one category – “qualified improvement property.” The stated intent was then to make such property eligible for bonus depreciation. The mechanism by which this was to be accomplished was to set the recovery period for “qualified improvement property” at 15 years, thereby meeting the 20-year recovery period threshold. However, the legislation did not actually change the recovery period for qualified improvement property, thus leaving it as 39-year property. As a result, this property does not technically qualify for bonus depreciation under the tax law changes. Technical corrections will be required to make this change, if this was the actual intent of the lawmakers. However, it is possible that even if the technical correction isn’t made that the expanded 179 limitations could aid in immediate expensing of such property, for certain businesses.

As your business starts to prepare for the impacts of the new tax law, keep in mind the changes to depreciation and Section 179. If you have any questions about these changes, please contact us.