The new Tax Cuts and Jobs Act (TCJA) of 2017 is designed to stimulate business growth by cutting corporate tax rates and enhancing tax benefits for acquiring business property. Under the TCJA, your company may be able to deduct the full cost of property placed in service in 2018 through a combination of rules relating to depreciation. The following is a brief overview of four favorable provisions in the new tax law.
- Section 179 expensing: The TCJA takes the already generous maximum allowance of $500,000 under Section 179 and doubles it to $1 million, beginning in 2018. In other words, a firm can “expense” (i.e., currently deduct) up to $1 million of qualified property placed in service in 2018. Furthermore, the threshold for phasing out the deduction is increased from $2 million to $2.5 million.
The maximum deduction is based on the percentage of business use for mixed-use property. In addition, the Section 179 allowance is limited to the amount of your company’s annual taxable income.
- Bonus depreciation: In a related provision, the 50% bonus depreciation deduction is doubled to 100%, effective for qualified property placed in service after September 27, 2017. Thus, bonus depreciation can be combined with the Section 179 allowance to expense most, if not all, of the cost of qualified property placed in service in 2018. Also, the provision is expanded to cover used property.
However, the bonus depreciation deduction will be phased out after five years, beginning in 2023. The phaseout schedule is as follows:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
- After 2026, zero bonus depreciation is allowed.
- 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 allowed for qualified leasehold improvement property, qualified restaurant improvement property and qualified retail improvement property.
The TCJA was meant to consolidate certain provisions under prior law and establish a 15-year cost recovery period for qualified improvement property. However, due to some unintended results, this consolidation must be clarified in a technical corrections act.
- Luxury cars: Under the so-called luxury car rules, depreciation deductions for vehicles used for business driving are subject to annual limits. Prior to the new law, these limits kicked in at relatively low levels. For instance, for a passenger vehicle placed in service in 2017, the limit was $3,160, based on 100% business use (plus $8,000 of bonus depreciation was allowed). This deduction had to be adjusted to reflect any personal use.
Now, the TCJA hikes the maximum deductions for vehicles, including a limit of $10,000 for the first year a car is placed in service—more than three times the prior allowance. (As before, bonus depreciation of $8,000 is allowed.)