Pat Lang is a senior associate at Corrigan Krause.
Accelerated depreciation is a tax strategy that businesses have been utilizing for quite some time. There are two types of accelerated depreciation: Section 179 Depreciation and standard Bonus Depreciation. A huge advantage of accelerated depreciation to business owners: the full cost of the purchase may be written off in the year that its placed into service, even if that asset is financed. This post highlights each category and the 2018 legislation changes regarding each method.
Section 179 Depreciation
For tax year 2018 taxpayers may elect to expense the cost of any section 179 property and deduct up to $1 million (up from $500,000 for tax year 2017). Section 179 property includes new or used equipment, machinery, certain business vehicles, office equipment, computers, furniture, etc. New for 2018, the phase-out threshold has increased from $2 million to $2.5 million. This means that section 179 deduction decreases dollar for dollar when annual capital purchases placed in service exceed $2.5 million. These amounts will be adjusted for inflation in future years. Per irs.gov, the following property also now qualifies for section 179 treatment:
- Roofs, HVAC, fire protection systems, alarm systems and security systems.
- Qualified improvement property, which means any improvement to a building’s interior.
However, improvements do NOT qualify if they are attributable to:
- the enlargement of the building,
- any elevator or escalator or
- the internal structural framework of the building.
When the new tax law was passed, it increased the Bonus Depreciation deduction from 50 percent to 100 percent of the asset’s cost for qualified property placed in service after September 27, 2017. The 100 percent deduction is in place until the end of tax year 2022 and includes both new and used assets. The new law also added qualified film, television, and theatrical productions as types of qualified property subject to the 100 percent deduction. Per irs.gov, certain property is excluded from Bonus Depreciation treatment:
- Electrical energy, water or sewage disposal services,
- Gas or steam through a local distribution system or
- Transportation of gas or steam by pipeline.
In addition to the above changes to section 179 and bonus depreciation, depreciation limits have also increased significantly for luxury automobiles and personal use property placed into service after December 31, 2017. Under the new law, taxpayers may now deduct up to $49,360 (including bonus depreciation) over the first four years of the asset’s life. This amount was equal to $21,185 under the old law. Under the new law, $10,000 ordinary depreciation is allowed plus $8,000 of additional bonus depreciation for a first year total deduction of $18,000.
Purchasing fixed assets before the end of the year can be an important tax strategy for your business. Not only do you get a significant tax savings, but you also have the assets that keep your customers satisfied. Certain states have limitations on section 179 and bonus depreciation. Please consult a tax professional at Corrigan Krause CPAs for the proper treatment of these items.