Bonus depreciation and tax reform – 100% is the new 50%

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bonus, depreciation, contractor, taxEveryone loves a bonus – maybe it’s a bonus at work or a bonus punch on your loyalty card at your favorite coffee shop. Even the tax code can give you a bonus occasionally. That’s right. I’ve already managed to take you from the highs of getting an extra paycheck for your hard work all the way to the lows of tax law. (Well, maybe it’s a low for you. We CPAs are accustomed to it) Don’t worry, bonus depreciation is a great benefit for those who can utilize it, and with tax reform in full swing, its benefits are even greater than before.

Before tax reform, bonus depreciation was allowed on business assets that met certain qualifications (most personal property like equipment, furniture and certain autos) and allowed you to write off 50% of the cost of the asset. That means that right away, you could take a depreciation deduction for 1/2 of what you purchased. The biggest caveat was that the bonus only applied to first-use assets. You couldn’t buy a used piece of equipment and take bonus depreciation (though you could take Section 179, but that’s another blog).

That all changed with TCJA (Tax Cuts and Jobs Act). Now, used property can be included in your bonus depreciation calculations and instead of 50%, it’s 100%! This is a huge benefit for several reasons, including the fact that bonus depreciation can be used to make a taxable loss. The 100% bonus rules kicked into effect on September 27, 2017 too; so, if you have already filed your business tax return for 2017, it’s possible some 100% bonus was factored into that as well.

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With all these benefits, there are sure to be several questions about how the new law impacts some grey areas. The Treasury Department and IRS recently released proposed regulations on the new depreciation laws. These regulations are important because even though they are not final, they give us a glimpse into the thinking of how laws will be enforced. One provision in the regulations explains that if you entered into a contract for someone to build you a piece of property (think a contractor building an office space or warehouse), that the date the agreement entered into is factored for determining if you can get 50% or 100% bonus (note that a building is not eligible for any bonus depreciation, but a cost segregation study can find components of the overall building that are eligible and those can be bonused at 100%). Before, the taxpayer needed to determine when work had substantially begun on the project. These regulations hope to clear up confusion in areas like this and provide more clear-cut rules for us to follow. The regulations also provide guidance if the property is self-constructed.

All good times must come to an end unfortunately. The 100% bonus depreciation is set to expire after 2022, at which point it begins to reduce 20% per year until ultimately it goes away completely after 2026. Bonus depreciation has been set to expire several times over since its inception, though, and every time Congress has brought it back in some form. We will see if the same is true this time around.

Have questions? Our tax professionals help clients in a variety of industries including construction, dealerships, restaurants, technology and more.

Brock R Yates, CPA, MT