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Expanded depreciation deductions In December 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. This is the most comprehensive tax reform package in over three decades, and it will have a major impact on how much income taxes manufacturers and distributors will pay in 2018. And there’s good news: In addition to lowering business tax rates, the new law significantly expands the tax breaks for capital expenditures. As a result, you may be able to save big tax dollars on purchases of fixed assets and property improvements that you make before the end of this year. Here are the details. Section 179 If you need new plant equipment, want to upgrade your accounting software or decide to remodel your office, it can provide a sizable tax break. Generally, you must “capitalize” these purchases — in other words, spread the deductions for capital expenditures over several years. But there are two tax breaks that allow you to accelerate these deductions for tax purposes: Section 179 and bonus depreciation. Although these deductions have been available in various amounts over the years, they’ve been expanded by tax reform. First, the TCJA permanently increased the Sec. 179 expensing limit for qualifying fixed asset purchases from $510,000 in 2017 to $1 million in 2018 and beyond. However, this break is phased out for qualifying purchases over $2.5 million in 2018 (up from $2.03 million in 2017). Going forward, these amounts will be indexed for inflation. Sec. 179 expensing for fixed asset purchases is phased out on a dollar-for-dollar basis for purchases that exceed the threshold amount. So, no Sec. 179 deduction is available if your total investment in qualifying property is above $3.5 million for 2018. What types of assets qualify for Sec. 179? Examples of assets that are eligible include machinery, equipment, vehicles and furniture. The TCJA also expands the leasehold improvement property that’s eligible for Sec. 179 to include roofs, HVAC equipment, and fire protection and security systems. With the permanent extension of the increased Sec. 179 expensing limit, you can now plan your annual capital expenditure budget with more certainty. Say you’re thinking of spending up to $1 million this year on qualifying fixed assets such as those listed above. If so, you might want to make purchases and place the assets in service before the end of the year. Bonus depreciation The second expanded tax break for capital expenditures is bonus depreciation. Under the old rules, businesses were allowed to deduct 50% of qualified property additions in the first year of service for 2017. Under the TCJA, companies are now allowed to fully deduct capital expenditures made after September 27, 2017, and no later than December 31, 2022. Unlike Sec. 179, bonus depreciation isn’t subject to any spending limits or phaseout thresholds. In addition, the new law expands the break to include new and used property, removing one of bonus depreciation's former disadvantages compared to Sec. 179 expensing. Unfortunately, the bonus depreciation breaks will sunset, starting in 2023, as follows:
For certain property with a longer production period and certain aircraft, the beginning and end dates in the list above are increased by a year. Qualifying property generally includes Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less, computer software and qualified improvement property. In addition, special rules apply to vehicle purchases and certain real property. In the past, some corporations chose to accelerate their alternative minimum tax (AMT) credits instead of taking bonus depreciation for assets they acquired. However, that option is no longer available under the new law, because the TCJA repeals the corporate AMT. Need help? The potential tax savings with Sec. 179 expensing and bonus depreciation are significant, but the rules can be complicated. Consult with your tax advisor for more details on how you can take full advantage of these taxpayer-friendly opportunities to grow your business. • |
Got company cars? Many small and midsize manufacturers provide company cars for their owners and salespeople. However, the deduction for luxury passenger automobiles is limited for federal income tax purposes. Under the new tax law, the limits for vehicles placed in service after December 31, 2017, are:
These amounts are indexed for inflation annually after 2018. For vehicles for which bonus first-year depreciation is claimed, the maximum additional first-year depreciation allowance remains at $8,000. |