Thanks to the Tax Cuts and Jobs Act signed by President Trump in late December, business owners have more options — and more ways to save on taxes — when they buy depreciable property. Owners of real estate have lots of great options.
100% Bonus Depreciation is Back
Through 2022, and retroactive to September 27, 2017, you can take 100% bonus depreciation on eligible property. But in 2023, the percentage will drop by 20% a year, until it’s all gone in 2027.
To be eligible, the property must have a depreciable life of less than 20 years, and this must be the first use of the property by the owner, which means that for the first time, a used property will be eligible. However, property purchased from a related party is ineligible.
In contrast to Section 179, bonus depreciation can be used to create a loss. Section 179 can only take income to zero, and any excess Section 179 has to be carried over to future years. Another difference between bonus depreciation and Section 179 is that bonus depreciation is limited only to the amount of eligible property acquired during the year, whereas Section 179 is subject to specific dollar limits and phaseouts, which we’ll discuss below.
Qualified Improvement Property Replaces Other Nonresidential Property Types
Qualified improvement property, first described in the 2015 PATH Act, replaces the previous categories of qualified retail improvement property, qualified leasehold improvement property, and qualified restaurant property.
This is a broad category and it’s easier to qualify. The only requirement is that the improvements be made to the interior of a non-residential building and put in service after the building is first placed in service. However, improvements such as elevators, escalators, enlargement of the building or any internal structural components, are still specifically excluded.
We should note that it appears that lawmakers intended to continue the favorable 15-year life that the older categories of qualified properties enjoyed — which would make it eligible for bonus depreciation — but as Tony Nitti points out, the modified statutes don’t clearly state that. We assume that this will be corrected at a later date.
Section 179 Just Got Bigger
Both the dollar limit and the eligible categories for Section 179 were expanded in the new law. Starting in 2018, businesses can expense up to $1 million worth of property, phasing out with $2.5 million in purchases. The old limit was $500,000, phasing out at $2 million in new property. The increased limits are now permanent and indexed for inflation, ending our previous uncertainty about whether temporary limits would be extended.
Here’s good news for owners of residential rental properties — under the old law, property “used predominantly to furnish lodging or in connection with furnishing lodging” was specifically excluded from Section 179. But under the new law, this property is now eligible for Section 179.
Owners of non-residential rentals can now take Section 179 on “qualified improvement property” and on improvements such as roofs, HVAC systems, fire alarms and security systems. Many of these items were previously disallowed.
Depreciation Limits for Cars Increased
Under the old law, the maximum first-year deduction including bonus depreciation for a new car was $11,160. With the new law, the first year limit is $10,000 for regular depreciation plus $8,000 of bonus depreciation for a total of $18,000. SUVs and trucks over 6,000 pounds are eligible for 100% bonus depreciation, although the old Section 179 limit of $25,000 remains intact.
The new law is full of other goodies for business owners, so be sure to call our office to find all the ways you can benefit!
Do you have questions about the new tax law and how it affects your tax planning strategy? Are you wondering about the tax impacts of new equipment purchases or real estate improvements? Email or call our office at 561-277-3195 and we’ll help you evaluate your options