Tax Reform Update: Enhanced Depreciation Provisions

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

This week we move on to a provision in the new law that should be easier to understand – the enhanced depreciation provisions. These tax provisions are meant to enhance the tax benefit of fixed asset purchases by taxpayers. Let’s take a look at what they are:

Bonus Depreciation

Under prior law, businesses could deduct 50% of the cost of new qualified property immediately – regardless of whether the deduction created a loss or not. In a surprising twist, effective for assets acquired and placed in service after September 27, 2017 and before December 31, 2022, 100% of the cost of qualifying property can be immediately expensed. That’s right – businesses working on their calendar year 2017 taxes need to determine their purchases before September 28 (eligible for 50% bonus depreciation) and after September 28 (eligible for 100% bonus depreciation) to compute the maximum bonus depreciation percentage. There is a catch though – assets under contract for purchase prior to September 27 are not eligible for 100% bonus depreciation but are eligible for the 50% depreciation deduction.

Other changes in the bonus depreciation provisions include:

  • Used property now qualifies for bonus depreciation. Prior law only allowed new property to be eligible for bonus depreciation.
  • Certain qualified improvement property (QIP) appears to be eligible for bonus depreciation. There’s a glitch in the new law language which seems to exclude such property; however, we believe revisions will be drafted to include QIP as bonus depreciation eligible.
    • QIP includes any improvement to the interior of a (not new) building that is not an enlargement, elevator, escalator or internal structure.
    • The old law only had special provisions for restaurant, retail and leasehold remodeling.
  • Illinois has stated that it will recognize 100% bonus depreciation for state purposes. In prior years, 50% or even 30% bonus depreciation was not allowed in determining Illinois tax.

Section 179 Expense

In addition to bonus depreciation provisions, the IRS allows businesses to write off up to $1,000,000 of qualified fixed asset purchases, subject to business income limitations. This amount is up from the $500,000 limit that applied in tax years ending before December 31, 2017. Additionally, the Section 179 expense begins to phase out at $2,500,000 of qualified purchases (up from $2,000,000 under the previous law). Section 179 expense reduces the tax basis of assets subject to other depreciation provisions including bonus depreciation.

Remember these provisions as you plan your budgets for future capital expenditures. If you have questions about the depreciation provisions, please call us at 630-953-4900.