Jump on New or Expanded TCJA Tax Breaks

Turbocharge tax deductions with bonus depreciation and Section 179

Benjamin Franklin once said, “Don’t put off until tomorrow what you can do today.” From taking advantage of growth opportunities to claiming tax deductions, this timeless wisdom applies in many business scenarios.

Generally, business owners should jump on tax-saving opportunities as soon as possible due to the time value of money. Under the Tax Cuts and Jobs Act (TCJA), there are two especially lucrative tax breaks for capital intensive manufacturers. These tax breaks include the expanded first-year depreciation deduction and the first-year Section 179 deduction. Both allow you to accelerate deductions for qualifying purchases of property, plants and equipment. Here’s what you should know.

Take advantage of first-year bonus depreciation

Under the new-and-improved bonus depreciation program, businesses can deduct 100% of the cost of certain assets in the first year they’re placed in service. Qualifying new and used assets placed in service between September 28, 2017, and December 31, 2022, can be implemented under this federal tax break. After that, the bonus depreciation percentage is reduced by 20% per year 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, bonus depreciation is fully phased out, unless Congress votes to extend the program. (Note: These deadlines are extended by one year for certain assets with longer production periods and for aircraft.)

For this break, most categories of tangible depreciable assets — other than real estate — qualify. Congress also intended for qualified real estate improvement property (QIP) placed in service after 2017 to be eligible for bonus depreciation. Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property are all included under QIP. However, due to a drafting error and prior law, QIP placed in service after 2017 still has a 39-year Modified Accelerated Cost Recovery System (MACRS) recovery period, as under prior law. Therefore, QIP is ineligible for bonus depreciation unless Congress passes a technical correction that makes bonus depreciation available.

Section 179 deduction

Alternatively, your business can elect to expense the cost of any Sec. 179 property and deduct it in the year the property is placed in service. The TCJA expanded the Sec. 179 deduction for qualifying assets placed in service in tax years beginning in 2018 and beyond. The maximum Sec. 179 deduction is $1.02 million for 2019 (up from $1 million for 2018, thanks to the annual inflation adjustment).

The TCJA also expanded the definition of qualifying assets for Sec. 179 deductions to include:

• Depreciable tangible personal property used mainly in the furnishing of lodging (such as furniture and appliances)
• QIP (except improvements to enlarge a building, elevators or escalators, and the internal structural framework of a building)
• Roofs, HVAC equipment, fire protection systems, and alarm and security systems for nonresidential real property

It is important to remember that the Sec. 179 deduction is phased out for larger businesses. If your qualified asset purchases for the year exceed $2.55 million for 2019 (up from $2.5 million for 2018), the deduction starts to be phased out. Sec. 179 limits and phaseouts are adjusted annually for inflation.

Sec. 179 expensing is limited to taxable income from a taxpayer’s active trades or businesses. That means that Sec. 179 deductions can’t create or increase an overall tax loss for the business. Any amount that can’t be currently deducted due to the taxable income limit can be carried forward to later years until it’s fully deducted.

Which is the right break for you?

Generally, if both 100% first-year bonus depreciation and the Sec. 179 deduction privilege are available for the same asset, you should claim 100% bonus depreciation because there are no limitations on that break.

In some situations, however, Sec. 179 expensing can be advantageous. For instance, it can be used to fine-tune annual deductions, doesn’t cause uniform capitalization (UNICAP) problems, and covers certain improvements to nonresidential real property that aren’t eligible for bonus depreciation. The availability of the two deductions provides greater flexibility than bonus depreciation alone.

Consider your options

To learn more about how to take advantage of these potential tax breaks, contact a Weaver professional today. We can discuss whether bonus depreciation, Sec. 179 expensing, regular MACRS depreciation or a combination of these methods makes the most sense for your business. There’s no right answer for everyone, but the TCJA provides a lot of flexibility in deducting purchases of property, plant and equipment.

What about business vehicle depreciation?  

The TCJA also expands the first-year tax breaks for qualifying business vehicles. Specifically, new and used passenger vehicles placed in service after December 31, 2017, and used over 50% for business, may be eligible for the following maximum annual depreciation deductions:

• $10,000 for 2018 (or $18,000 if you claim first-year bonus depreciation)
• $16,000 for 2019
• $9,600 for 2020
• $5,760 for 2021 and thereafter until the vehicle is fully depreciated

These allowances will be indexed for inflation for 2019 and beyond. Heavy SUVs, pickup trucks and vans are treated as transportation equipment for tax purposes. That means they qualify for 100% first-year bonus depreciation. To qualify, heavy vehicles must have a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds, and they must be used over 50% for business purposes.

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