Tax Reform and Bonus Depreciation
Editor’s Note: Tax reform made sweeping changes to tax law, and effects many elements of taxation. A key element changed was bonus depreciation. Learn more about what it is and how it’s changed here!
What is Bonus Depreciation?
Bonus depreciation allows your business to take an immediate first-year deduction on the purchase of an eligible business property, in addition to other depreciation.
It’s a method of accelerated depreciation, so business can deduct an additional 50% of the cost of qualifying property in the year in which it is put into service. This extra depreciation allowance is only for new equipment.
What Has Changed With Bonus Depreciation?
The Tax Cut and Jobs Act (TCJA) included a provision for bonus depreciation that allows a deduction for 100% of the purchase price of qualifying property.
When Does It Go Into Effect?
This provision applies to qualifying property acquired and placed in service after September 27, 2017 and before January 1, 2023.
What is Qualified Property?
Not all property qualifies for the 100% bonus depreciation deduction. Several conditions must be met for property to qualify for the deduction:
- The property must have a MACRS recovery period of 20 years or less. This generally means property other than building structures or building systems.
- The property must not be specifically excluded from bonus depreciation.
- Bonus depreciation is only allowed for the year that the property is placed in service.
- Even if property qualifies for bonus depreciation, you can elect out of this provision and use the applicable MACRS depreciation method instead.
Additionally, vehicles are subject to different limits depending on the type and size of the vehicle. For example, vehicles with a gross vehicle weight of 6,000 pounds or less are limited to $8,000 of first-year bonus depreciation. The remaining cost may be depreciated under special rules that are described in IRS publication 946. Combined first-year depreciation (bonus plus regular) is limited to $18,000 for passenger cars (other than heavy SUVs), trucks, and vans.
The table below highlights the 2018 vehicle depreciation limits.
Which is Better §179 Expensing or Bonus Depreciation?
Some property qualifies for 100% expensing under both §179 and §168(k) (bonus depreciation).
Bonus Depreciation > §179
Bonus depreciation has a couple of advantages over §179.
- Bonus depreciation can create an NOL whereas §179 is limited to taxable income.
- If business use percentage of property falls below 50%, deductions claimed under §179 must be recaptured as ordinary income whereas those claimed as bonus depreciation do not have to be recaptured until the property is sold.
However, one more important consideration is the state income tax treatment of the depreciable property. It’s not uncommon for states to require a smaller depreciation deduction even though you qualify for 100% bonus depreciation or §179 expensing on your federal tax return. If you do decide to use 100% bonus depreciation on your federal return, you may have to keep a separate depreciation schedule for state income tax purposes.
All of these considerations require a careful analysis of your particular situation. At Block Advisors, we have the expertise and experience to help you make the decision that’s best for you.