Depreciable assets: potential new tax law impact

Your Guide to State, Local, Federal, Estate + International Taxation

depreciable assets, tax law, tax reform, businessAre you aware of the potential new tax law and how it may impact your business? Some of the potential changes deal with the modification of rules for expensing certain depreciable assets. Below are a couple of the major updates that have made it through conference agreement and are yet to be voted on this week (please note that this technically is not law yet as of 12/20/17). Please consult your tax advisor on how and when it may apply to you.

§179 expensing

  • Increases the maximum amount that could be deducted to $1,000,000 (up from $500,000).
  • The above limit is reduced dollar for dollar to the extent the total cost of §179 property placed in service during the year exceeds $2,500,000 (up from $2,000,000).
  • These changes would be for property placed in service in the tax year beginning after 2017.
  • §179 expensing for a sports utility vehicle is $25,000 (unchanged), but will be indexed for inflation starting after 2017.
  • Expands the eligible property to include personal property used in connection to furnishing lodging (i.e. beds and other furniture).
  • Would further expand (at the taxpayer’s election) to certain real property improvements, so long as the improvements are made after the date of realty was placed in service.

Bonus depreciation

  • Increased to 100% (up from 50%) for property placed in service after September 27, 2017, and before 2023.
  • It would start to phase down in 2023 by 20% each year.
  • Property that is acquired prior to September 27, 2017, but placed in service after September 27, 2017 would remain subject to the rules available under the “old” current law.
  • Property eligible for bonus depreciation would now include “used property”, so long as the acquiring taxpayer had not previously used the acquired property, and if it is not acquired from a related party.
  • Property used in an electing “passive” real property activity or “electing farm” trade or business, or a business that has “floor plan financing indebtedness,” is not eligible for these new rules. Basically, any activity that is not subject to the new interest expense limitation rules.

2018 Depreciation limits on luxury automobiles (as defined by the IRS) and personal use property

  • If bonus depreciation is not claimed (or ineligible), allowable depreciation would be limited to:
    • $10,000 in year one
    • $16,000 in year two
    • $9,600 in year three
    • $5,760 in all subsequent years
  • Bonus depreciation would add an additional $8,000 to your first-year deduction, if applicable.
  • Limits apply to any passenger automobile that cost over $50,000 (previously $15,800).
  • The example above assumes 100% business use.
Placed in service yearBonus depreciation percentage
Qualified property in general/specified plantsLonger production period property and certain aircraft
Portion of basis of qualified property acquired before September 28, 2017
September 28, 2017 - December 31, 201750%50%
2021 and thereafterNoneNone
Portion of basis of qualified property acquired after September 27, 2017
September 28, 2017 - December 31, 2022100%100%
2028 and thereafterNoneNone

Jeremy Smith, CPA