The Tax Cuts and Jobs Act was signed into law on Dec. 22, 2017, and it provides many incentives for small business owners, including three ramped up depreciation benefits you should know about:
1. Bonus Depreciation
Congress has increased bonus depreciation from 50 percent to 100 percent for property placed in service after Sept. 27, 2017. Generally, bonus depreciation applies to personal property, such as furniture and equipment, and now, used property also qualifies for the deduction.
Your clients can only elect out of bonus depreciation on an asset class basis and must attach an election statement to do so. Bonus depreciation will not begin phasing down until 2023 under the following schedule:
Congress has doubled the Section 179 limit from $500,000 in prior years to $1 million in 2018 and beyond for qualified property. The annual phase-down threshold based on investment has increased from $2 million to $2.5 million.
The Section 179 deduction allows for more flexibility than bonus depreciation because taxpayers are able to pick and choose the assets and amounts versus an all-or-nothing approach required of bonus depreciation (per asset class). But remember, the 179 deduction is limited to business income and is recaptured if the business use percentage drops below 50 percent.
Under the current law, qualified real property eligible for Section 179 has been expanded to include personal property used predominantly to furnish lodging, so has been expanded to include rentals. Examples include beds, furniture, refrigerators, ranges, roofs, HVAC property, fire protection, alarm systems and security systems. To qualify, these items must be placed in service after the date nonresidential real property was placed in service.
It’s important for the small business owner to consider purchasing assets and taking advantage of the first-year deductibility, which thereby reduces their taxable income.
3. Luxury Auto Limits
Another big gift in the area of deprecation is the automobile depreciation limits, which have almost been tripled under the new law. As a reminder, the word “luxury” applies to almost all four-wheeled vehicles that drive on public roads and weigh less than 6,000 lbs.
Below are the auto limits beginning in 2018 under the new law. Remember to add $8,000 to the first-year amounts when bonus depreciation is taken.
Any depreciation that is not allowed because of these annual limitations is allowed once the vehicle reaches the end of the depreciation schedule but is still subject to certain limits:
1. Bonus Depreciation
Congress has increased bonus depreciation from 50 percent to 100 percent for property placed in service after Sept. 27, 2017. Generally, bonus depreciation applies to personal property, such as furniture and equipment, and now, used property also qualifies for the deduction.
Your clients can only elect out of bonus depreciation on an asset class basis and must attach an election statement to do so. Bonus depreciation will not begin phasing down until 2023 under the following schedule:
- 100 percent for property placed in service after Sept. 27, 2017, and before Jan. 1, 2023
- 80 percent for property placed in service during calendar year 2023
- 60 percent for property placed in service during calendar year 2024
- 40 percent for property placed in service during calendar year 2025
- 20 percent for property placed in service during calendar year 2026
Congress has doubled the Section 179 limit from $500,000 in prior years to $1 million in 2018 and beyond for qualified property. The annual phase-down threshold based on investment has increased from $2 million to $2.5 million.
The Section 179 deduction allows for more flexibility than bonus depreciation because taxpayers are able to pick and choose the assets and amounts versus an all-or-nothing approach required of bonus depreciation (per asset class). But remember, the 179 deduction is limited to business income and is recaptured if the business use percentage drops below 50 percent.
Under the current law, qualified real property eligible for Section 179 has been expanded to include personal property used predominantly to furnish lodging, so has been expanded to include rentals. Examples include beds, furniture, refrigerators, ranges, roofs, HVAC property, fire protection, alarm systems and security systems. To qualify, these items must be placed in service after the date nonresidential real property was placed in service.
It’s important for the small business owner to consider purchasing assets and taking advantage of the first-year deductibility, which thereby reduces their taxable income.
3. Luxury Auto Limits
Another big gift in the area of deprecation is the automobile depreciation limits, which have almost been tripled under the new law. As a reminder, the word “luxury” applies to almost all four-wheeled vehicles that drive on public roads and weigh less than 6,000 lbs.
Below are the auto limits beginning in 2018 under the new law. Remember to add $8,000 to the first-year amounts when bonus depreciation is taken.
Any depreciation that is not allowed because of these annual limitations is allowed once the vehicle reaches the end of the depreciation schedule but is still subject to certain limits:
- $10,000 year one (was $3,160 under prior law)
- $16,000 year two (was $5,100 under prior law)
- $9,600 year three (was $3,050 under prior law)
- $5760 years four through six (was $1,875 under prior law)
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