The Tax Cuts and Jobs Act (TCJA) has amplified two depreciation-related breaks that are great year-end tax planning tools for businesses. To take advantage of these breaks, you need to buy qualifying assets and place them in service by year end. Meaning, if you act soon, there’s still time to reduce your 2018 tax liability with these breaks.
Section 179 expensing
Sec. 179 expensing is valuable since it permits businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the value of the assets over a number of years. You can use Sec. 179 expensing for assets such as furniture, equipment, and software. Starting in 2018, the TCJA expanded the list of qualifying assets to include certain property used primarily to furnish lodging, qualified improvement property, and improvements to nonresidential real property such as roofs, HVAC equipment, fire protection, alarm systems, and security systems.
The maximum Sec. 179 deduction has been raised from $510,000 for 2017 to $1 million for 2018. When total asset acquisitions for the tax year exceed $2.5 million the deduction begins to phase out dollar-for-dollar for 2018, which again is higher than the $2.03 million for 2017.
100% bonus depreciation
The TCJA permits you to claim 100% first-year bonus depreciation for qualified assets that your business places in service in 2018, compared to 50% in 2017. This break is available when buying software, computer systems, office furniture, machinery, and equipment. The TCJA has enlarged eligible assets to include used assets; where previously, only new assets were eligible.
However, due to a TCJA drafting error, if a technical correction is issued only qualified improvement property will be eligible. Also, under the TCJA, certain businesses are not eligible for bonus depreciation in 2018. Businesses that are not eligible are auto dealerships with floor plan financing (if the dealership has average annual gross receipts above $25 million for the three previous tax years), and real estate businesses that decide to deduct 100% of their business interest.
A traditional, powerful strategy
Consider that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So, purchasing vehicles before the year-end could reduce your 2018 tax liability. However, additional limits may apply, depending on the type of vehicle.
Investing in business assets is a powerful year-end strategy for tax planning that might make more sense in 2018 because of the TCJA adjustments to Sec. 179 expensing and bonus depreciation. Contact us if you want to know more about these breaks or other ways to maximize your depreciation deductions.
Ben R Shull CPA LLC provides clients with tax, transaction, and advisory services. The insights and quality services we deliver help lead our clients through the next generation of changes, and accelerate growth while reducing risk. CPA Katy, TX.