Tax Reform Changes To Depreciation

By now, you’ve heard of the tax rate changes, qualified business deduction, and the doubling of the standard deduction – but did you know the Tax Cuts and Jobs Act also changed some depreciation provisions? The new provisions following bonus depreciation and section 179 depreciation are what most business owners find beneficial come tax time. Read on to see how these changes impact you!

Bonus Depreciation

Under the old law, you were able to expense 50% of the cost of certain property in the current year instead of depreciating its total value over its useful life. Fortunately, that percent has moved up to 100% through December 2022. Basically, you can fully expense qualified property in the year it’s bought during the next four years with no depreciation taken on the asset in future years.

So, what exactly is qualified property? According to fancy tax jargon, it’s tangible personal property with a recovery period of 20 years or less. English translation: almost everything other than real property (such as buildings and land improvements). Further, unlike old tax regulation, the purchased asset does not have to be new. You can now take bonus depreciation on both new and used purchased assets.

Section 179 Depreciation

Section 179 depreciation is another way to accelerate the depreciation expense of an asset to the year in which it is purchased. There is an extra layer of control that comes with this kind of depreciation because, unlike bonus depreciation where you either take the 100% or nothing, you can choose how much depreciation to take on the asset in the first year under section 179. Remember that this doesn’t include ‘regular’ depreciation, rather only the amount you wish to accelerate and deduct in the current year.

In terms of the tax reform, you can now deduct up to $1 million of section 179 depreciation, compared to the original limit of $510,000. Further, the phaseout threshold has increased from $2.03 million to $2.5 million. Starting in 2018, your business’ allowed section 179 depreciation of $1 million will be reduced by the total assets bought in the current year that surpass $2.5 million. For example, assume that your company bought $2.65 million worth of assets during 2018, which is $150,000 over the threshold of $2.5 million. Consequently, the business would only be able to deduct $850,000 ($1,000,000 – $150,000) of section 179 depreciation.

Should I Take Bonus Depreciation or Section 179 Depreciation?

The final question to ask is which is more beneficial to take, bonus depreciation or section 179 depreciation? Well, like all questions related to tax, the answer is that it depends. Section 179 lets you choose first-year depreciation and it’s also been expanded to include certain improvements made to real property after the property was placed in service. On the other hand, there is no limitation on how much bonus depreciation you can take a year and it doesn’t matter if the depreciation results in a net loss, unlike section 179. Bonus depreciation also includes used property.

One last thing to keep in mind is that both depreciation methods are completely optional. Thus, if you don’t need additional deductions, you can push depreciation to future years when you might need it. All in all, it is best to consult with your tax professional to ensure the most optimal method given your specific tax situation.

Need help planning ahead to reap the benefits of the new tax reform, or have additional questions on how depreciation works? Call Paragon Accountants and schedule your appointment today!