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Depreciation Changes Under the Tax Cuts and Jobs Act

January 7, 2019

At the end of 2017, the Senate passed the Tax Cut and Jobs Act (TCJA).  This piece of legislation created a wide-array of changes to the tax laws that were in place at the time.  Among these changes were revisions to depreciation.

Bonus Depreciation

The prior law allowed you to claim a 50% bonus depreciation deduction for new assets placed in service.  There is a taxpayer-friendly provision included in the tax reform package which allows bonus depreciation to expand to 100% for qualified property placed into service after September 27, 2017 and before January 1, 2023.  Additionally, bonus depreciation now applies to any used property that is new to the taxpayer.

Beginning in 2023, the new bonus depreciation provisions will be reduced to 80%, then 60% in 2024, 40% in 2025, 20% in 2026, and finally in 2027 bonus depreciation is scheduled to expire.

Section 179 Deduction

Under the prior law, the Section 179 deduction for tangible personal property allowed taxpayers to claim a deduction up to $500,000 with a phase-out threshold of $2 million.  The new law increased the deduction to $1 million, with a phase-out threshold of $2.5 million for property placed in service after December 31, 2017.  Both the deduction limit and the phase-out threshold are indexed for inflation for tax years beginning after 2018.

The TCJA also changed what can fall under the definition of qualified real property for Section 179.  Now certain improvements to nonresidential real property placed in service after the date the property was originally placed in service can qualify for the Section 179 deduction.  These types of improvements include the following:  roofs, heating, ventilation, and air-conditioning (HVAC) property, fire protection systems, and security systems.  These types of assets were previously required to be depreciated over 39 years, without any allowance for special depreciation deductions.

Certain Passenger Autos

Depreciation for certain passenger autos has limitations for the allowable deduction each year.  The deduction is tiered over the early life of the asset.  These tiers have increased significantly under the TCJA.

  • Year 1 – Increased from $3,160 to $10,000
  • Year 2 – Increased from $5,100 to $16,000
  • Year 3 – Increased from $3,050 to $9,600
  • Year 4 and on – Increased from $1,875 to $5,760

The dollar limits listed above will be indexed for inflation for tax years after 2018.

Qualified Improvement Property

The old law had separate definitions for qualified leasehold improvements, qualified restaurant, and qualified retail improvement property.  The new law simplified this and created one definition for qualified improvement property (QIP) effective after December 31, 2017.  Qualified improvement property is now defined as an improvement to the interior portion of a nonresidential building.  This does, however, exclude improvements for the enlargement of a building, elevators, escalators, and internal structural framework.  The prior law had a provision that disallowed improvements made to a building that would normally qualify to be treated as qualified improvements if the improvements were made within the first three years the building was first placed in service.  The TCJA removed this stipulation.

This particular section of the law has created some controversy.  The intention was to allow for a 15-year depreciable life, which allowed for bonus depreciation for QIP, but the section of existing law which would have made QIP 15-year depreciable property was deleted by the TCJA.  Not only did this oversight increase the envisioned 15-year life to 39 years, it also made QIP not eligible for bonus depreciation.  There is hope that congress will correct the mistake so that the law reads as intended; however, corrective legislation has yet to be passed. 

Overall, the changes made were taxpayer-friendly, and allowed for more deductions. Please feel free to contact your MarksNelson advisor at 816-743-7700, if you would like to discuss the impact of these change on your business.
Becca focuses on partnership taxation, real estate accounting, and tax services for high-net-worth clients. She also assists real estate clients with due diligence and prepares financial models using Argus for potential or current investments. Becca joined MarksNelson in 2012 as a staff accountant ... >>> READ MORE
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