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Expanded Tax Deductions Make Now the Perfect Time to Invest in Your Business by Angie Adames, CPA

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Posted on May 26, 2019 by Angie Adames

The U.S. tax laws have a long history of incentivizing taxpayers to invest in their domestic business operations and purchase equipment, machinery, vehicles and other capital assets that are essential to generating business income. With the enactment of the Tax Cuts and Jobs Act (TCJA) effective for tax year 2018, the government has sweetened the pot and expanded the benefits of both the Section 179 expense deduction and first-year bonus depreciation.

The Section 179 Deduction

The TCJA doubled the amount that taxpayers can deduct for the costs they incur to acquire Section 179 business property in the first year they put the property to use rather than depreciating those costs over many years. To qualify for Section 179 expensing, property must be purchased for use in the active conduct of a trade or business.

For tax year 2019, the amount of the deduction, which is indexed annually for inflation, is $1.02 million with a phase-out limit of $2.55 million.

At the same time, the new law expands the definition of Section 179 real property beyond computers and equipment to include qualified improvement property (QIP), such as roofing, air conditioning/heating units, fire protection, security systems and other non-structural components attached to commercial real estate. While QIP generally applies to improvements made to a non-residential building’s interior, it specifically excludes changes attributable to a building’s interior structure, the building’s enlargement or its elevators and escalators.

There are two important factors that taxpayers should consider when applying the Section 179 deduction. First, depreciation cannot be accelerated to the point that it reduces a business’s taxable profit below zero in a given year. Under these circumstances, the businesses would need to carry forward any unused amount to future years. Secondly, any expenses that are not eligible for an immediate deduction under Section 179 may be recovered through bonus depreciation or accelerated depreciation methods.

Bonus Depreciation

Unlike Section 179 property, which is subject to income limitations, first-year bonus depreciation under the TCJA allows businesses to write off 100 percent of the costs for both new and used property in the year “eligible property” was acquired. Previously, bonus depreciation was limited to 50 percent and applied only to new property that taxpayers purchased or financed during the tax year. 100 percent bonus depreciation is a temporary provision of the new law that applies only to property acquired and placed in service between Sept. 27, 2017, and Dec. 31, 2022. Beginning on Jan. 1, 2023, the applicable bonus depreciation percentage will be gradually reduced.

The 100 percent bonus depreciation deduction generally applies to new or “used” depreciable business assets with a recovery period of 20 years or less, including machinery, equipment, computers, appliances and furniture.

The Intersection of Bonus Depreciation and Section 179 Deductions

In general, a taxpayer would first claim Section 179 deductions to reduce the initial cost of acquired property and then apply bonus depreciation to reduce the remaining costs of the property over its useful life. However, taxpayers who can benefit from one or both deductions to reduce their tax burdens in one year should take special care to avoid sacrificing the tax-saving benefits of depreciation in future years.

Moreover, businesses that must forgo bonus depreciation on certain assets, perhaps due to the law change which made QIP ineligible for bonus depreciation, may have a unique opportunity to instead write off the full costs of that property in the first year by expensing the costs under Section 179 of the tax code.

Despite the many welcome provisions that the TCJA brings to real estate professionals and investors, taxpayers should meet with experienced advisors and accountants to properly evaluate the short- and long-term effects on their tax planning strategies.

 

About the Author: Angie Adames, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.