The TCJA makes some changes to the Section 179 and bonus depreciation laws that will significantly change the way the cost of fixed assets are deducted. The following is a summary of the old and new provisions of the Section 179 deduction. We will cover the changes to bonus depreciation next week.
Changes to the Section 179 rules are effective for property placed in service in tax years beginning after December 31, 2017.
- Before TCJA - there were varying levels of Section 179 expense allowed throughout the years. The 2017 limit was $510,000 of Section 179 per individual return.
- After TCJA - $1,000,000 of Section 179 is allowed per individual return. This amount is indexed for inflation for years after 2018.
- Before TCJA - in 2017, the deduction started to phase out after $2,030,000 of eligible property was placed in service and the deduction was completely phased out after $2,540,000 of eligible property was placed in service.
- After TCJA - the deduction will start to phase out after $2,500,000 of property is placed in service and will be completely phased out after $3,500,000 of property is placed in service during the year. This amount is indexed for inflation for years after 2018.
- Before TCJA - property eligible for the Section 179 deduction included tangible personal property, off the shelf computer software, and certain “qualified real property.” Property not eligible included buildings and non-production-process related land improvements. Also specifically excluded were roofs; built-in heating, ventilation, and air conditioning; built-in fire protection and alarm systems; and built-in security systems, unless they were “qualified real property.”
- After TCJA - property eligible for the Section 179 deduction still includes tangible personal property, off the shelf computer software, and certain “qualified real property.” However, the definition of “qualified real property” now includes roofs; heating, ventilation, and air-conditioning property (HVAC property); fire-protection and alarm systems; and security systems.
Property Used to Furnish Lodging
- Before TCJA - property used predominantly to furnish lodging, such as apartment buildings or dormitories were not eligible for the Section 179 deduction.
- After TCJA - tangible personal property used predominantly to furnish lodging is eligible for the Section 179 deduction. This includes beds and other furniture, refrigerators, ranges, and other equipment used in the living quarters of the facility.
Sport Utility Vehicles (SUVs)
- Before TCJA - the Section 179 taken on an SUV was limited to $25,000.
- After TCJA - the Section 179 deduction allowed on SUVs will be adjusted for inflation beginning with tax years after 2018.
The following are some points about the Section 179 deduction that remain the same both before and after the TCJA.
- The Section 179 deduction can be taken on both new and used equipment.
- Section 179 can be elected, or not, for each asset, as opposed to by asset class.
- The use of the Section 179 deduction cannot force a business into a loss.
When reading through the changes to the Section 179 deduction, they seem like a great tax break opportunity because businesses will now have an expanded ability to deduct the cost of new equipment and improvements in the year of purchase. However, we need to keep in mind that the benefit gained here is the value of having the tax savings in the year that the property is purchased rather than in later years, which would be the case if the property was depreciated over its class life. This isn’t a new deduction, just an accelerated deduction.
The other side of that is, in years that a business does not purchase a significant amount of equipment or improvements, its taxable income will be much higher due to not having depreciation expense. This will be important to keep in mind when planning for the cash flow needs of the company. The tax savings in the initial year of purchase should be used and planned for wisely. In subsequent years when taxable income could be higher, and the company still has the debt service associated with the purchase, cash flow to pay income taxes could be tight.
Another consideration, when determining whether to utilize a Section 179 election, should be the state limitations for Section 179 expenses in states where you file a tax return. Most states have some decoupling provisions which may reduce the amount of Section 179 depreciation deduction in the year of election. These state considerations can be considerable, especially when determining whether to use Section 179 or bonus depreciation, when choosing to accelerate depreciation expenses. We will explore bonus depreciation and compare the two methods next week.