IRS has issued a fact sheet that highlights some of the new rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017).
Increased expensing amounts. A taxpayer may elect to expense the cost of any Code Sec. 179 property (see below) and deduct it in the year the property is placed in service. The TCJA increased the maximum deduction from $500,000 to $1 million, and increased the phase-out threshold from $2 million to $2.5 million, effective for property placed in service in tax years beginning after 2017.
The TCJA also expanded the definition of Code Sec. 179 property, also effective for property placed in service in tax years beginning after 2017, to allow taxpayers to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:
Qualified improvement property, which means any improvement to a building’s interior, except improvements attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.
Roofs, HVAC, fire protection systems, alarm systems and security systems.
First-year bonus depreciation. The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (Jan. 1, 2024 for certain aircraft and property with longer production periods). The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50%.
The definition of property eligible for 100% bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017 if: (i) the taxpayer didn’t use the property at any time before acquiring it, or acquire the property from a related party or component member of a controlled group of corporations; (ii) the taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor, and is not figured under the provision for deciding basis of property acquired from a decedent. Also, the cost of the used qualified property eligible for bonus depreciation doesn’t include any carryover basis of the property e.g., in a like-kind exchange or involuntary conversation.
The new law added qualified film, television and live theatrical productions as types of qualified property that are eligible for 100% bonus depreciation, effective for property acquired and placed in service after Sept. 27, 2017. Under the TCJA, certain types of property are not “qualified property” eligible for bonus depreciation, including most public utility property and any property used in a trade or business that has floor-plan financing.
Luxury auto limits. The TCJA changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is: $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for each later tax year in the recovery period.
On the other hand, if a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is: $18,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for each later tax year in the recovery period.
Limits on personal use property. For property placed in service after 2017, the TCJA removed computer or peripheral equipment from the category of “listed property” subject to restrictive limits on depreciation and expensing deductions.
Farm property. The TCJA shortened the recovery period for machinery and equipment used in a farming business from seven to five years (but excluding grain bins, cotton ginning assets, fences or other land improvements). The original use of the property must occur after 2017, and the shortened recovery period is effective for property placed in service after 2017. Also, property used in a farming business and placed in service after 2017, is not required to use the 150% declining balance method, except for 15-year or 20-year property.
Recovery period—real property. For property placed in service after 2017, the TCJA shortened the alternative depreciation system (ADS) recovery period for residential rental property from 40 years to 30 years. Also under the TCJA, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period.
Under the TCJA a real property trade or business electing out of the interest deduction limit under Code Sec. 163(j) must use the ADS to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property, effective for tax years beginning after 2017.
Use of ADS for farm businesses. Farming businesses that elect out of the interest deduction limit must use the alternate depreciation system (ADS) to depreciate any property with a recovery period of 10 years or more, such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings and certain land improvements, effective for tax years beginning after 2017.