As the Tax Cuts and Job Act (TCJA) continues to be unraveled by tax professionals, it’s important to review the changes and their implications on business operations and tax strategies. In this article, we’ll highlight TCJA’s changes to first-year bonus depreciation, luxury auto depreciation, Section 179 deduction changes, and some changes for real property recovery periods.
Bonus First-Year Depreciation
Before the TCJA, business owners were able to deduct 50 percent of costs for qualified property in its first year of service, as long as the property was placed in service before 2018. For service placements that occurred in 2018, the deduction lowered to 40 percent and 30 percent for 2019. The deduction did not apply to years after 2019.
Additionally, this deduction was only applicable to MACRS property with a recovery period of 20 years or less, property for water utilities, computer software not specified in IRC Sec. 197, or qualified improvement property.
Under the TCJA, the bonus first-year depreciation deduction for qualified property was increased to 100 percent and applies to used, as well as new property (with limitations), placed in service between September 17th, 2017 and January 1st, 2023. The deduction phased out to 80 percent for placements in 2023, 60 percent for 2024, 40 percent for 2025, and 20 percent for 2026.
For property with extended production periods and specified aircraft, the phase begins in 2024 and decrements in the same amounts as above.
The definition of qualified property was also revised to include specified film, theatrical, and television productions.
Luxury Automobile Depreciation
Before 2018, the deduction thresholds for were $3,160 for a vehicle’s first service year, $5,100 for the second year, $3,050 for the third year, and $1,875 for following years.
Following the TCJA, for luxury passenger vehicles placed in service after 2017 (and have not already claimed bonus depreciation in 2018), the depreciation limit is $10,000 for the first year of service, $16,000 for the second year, and $9,600 for the third year, and $5,760 for subsequent years.
Section 179 Deduction Changes
The TCJA brought changes to both the Section 179 deductions thresholds and the definition of qualifying property. For property placed in service after 2017, the maximum deduction was increased from $520,000 to $1 million and the threshold from $2.07 million to $2.5 million.
The definition of qualifying property was expanded to include specific tangible property used for furnishing lodgings, as well as some upgrades to non-residential real property, like roofing and alarm systems.
Recovery Period Changes
For properties placed in service before and during 2017, qualified property for leasehold improvements, restaurants, and retail improvements are considered 15-year MACRS property. For residential rental property, the ADS recovery period is 40 years.
Following the TCJA, the property definitions for qualified leasehold improvement, qualified restaurant, and qualified retail improvements are eliminated. Qualified improvement property refers to improvements to the interior of a nonresidential real property if the improvement is placed in service after the property’s initial placement date. Qualified improvement property now has a 15-year recovery period (20 years for ADS) and involves the straight-line method. Residential rental properties now have an ADS recovery period of 30 years.
If you’d like more information about the effects of the TCJA and how it may affect your tax strategy, feel free to contact us!