How to Navigate New Rules for Expensing Capital Assets: Section 179 Expensing and Bonus Depreciation

The new tax rules for writing off large purchases for equipment and other forms of tangible property may have you asking:

  • Can I write off the entire cost of the equipment I just purchased?
  • What property is eligible for expensing and depreciation deductions now?
  • Which method for expensing large equipment purchases will benefit my business the most?
  • Should I go ahead and claim 100% bonus depreciation, or is there a better choice for my situation?

Changes to the methods for calculating bonus depreciation and section 179 deductions have many businesses jumping for joy. Increased spending caps and higher deduction amounts could mean larger write-offs for your business. There are several options and methods businesses need to consider before making a final decision on which incentives to claim if they want to get the most out of tax reform.

New Rules for Section 179 Deductions

The Tax Cuts and Jobs Act (“TCJA” or “Act”) makes some important changes to the deduction amount businesses can claim under section 179 and what kind of property is eligible for the deduction.

Section 179 Rules
Prior to the TCJA
Section 179 Rules
After the TCJA
Deduction limit was $500,000 Deduction limit raised to $1 million
Applied to new and used equipment, including off-the-shelf software Applies to new and used equipment, including off-the-shelf software (no change)
Qualified improvement property (“QIP”) was broken down into three separate definitions for qualified leasehold property, restaurant property and retail improvement property; certain improvements, such as HVAC, security, and repairs to any structural part of the real property, were not eligible QIP now has a single combined definition that includes the three previous categories, plus tangible personality in furnished rental properties (e.g., appliances, furniture) and certain improvements to nonresidential real property made after the property was first placed in service (e.g., roofs, HVAC, fire protection, security systems)
Spending cap on equipment purchases was $1 million (the dollar-for-dollar phase-out limit was $2 million) Spending cap on equipment purchases raised to $2.5 million (dollar-for-dollar phase-out after that; no deduction for purchases over $3.5 million)

The Act states that the deduction and phase-out amounts will be adjusted for inflation starting in 2019. In order for equipment to qualify for the deduction, it must be used for business purposes more than 50% of the time.

New Rules for Bonus Depreciation

Under the old section 168, the deduction for bonus depreciation was limited to 50% of qualified new property.

The Act makes certain key adjustments to this rule:

  • The deduction was raised from 50% to 100% of qualified property both acquired and placed in service beginning on September 28, 2017, and before January 1, 2023, as long as the depreciable recovery period is 20 years or less. (For example, if property was acquired prior to September 28, 2017, but placed into service after September 30, 2017, it would fall under the old rules due to the date of acquisition.)
  • Certain property that has longer production periods can claim 100% bonus depreciation through December 31, 2023.
  • Property no longer has to be new in order to qualify – it just has to be new to you.
  • Since the corporate alternative minimum tax (“AMT”) has been repealed, taxpayers can no longer elect to accelerate AMT credits in lieu of bonus depreciation.

Any asset that is required to apply the Alternative Deprecation System (“ADS”) will not be eligible for 100% expensing. Assets acquired as part of furnishing or selling certain utility and energy services (such as electrical energy, water or sewage disposal services; local gas or steam distribution; or pipeline transportation of gas or steam) also aren’t eligible for bonus depreciation.

The new bonus depreciation schedule is as follows:

Property Placed in Service

Bonus Depreciation

After 9/27/2017

Before 1/1/2023

100%
After 12/31/2022

Before 1/1/2024

80%
After 12/31/2023

Before 1/1/2025

60%
After 12/31/2024

Before 1/1/2026

40%
After 12/31/2025

Before 1/1/2027

20%

Quick Reference Comparison of Bonus Depreciation and Section 179 Expensing

Here’s a quick comparison of the similarities and differences in these two provisions:

Similarities

  1. Starting in 2018, both provisions can be applied to new and used (as long as it’s new to you) property in the first year the property is placed in service by the taxpayer.
  2. Both tax rules allow the full cost of the asset to be expensed (subject to section 179 limitations).

Differences

  1. Bonus depreciation must be applied to all assets placed in service for the year in a specific class life. Section 179 expensing, on the other hand, can be applied on an asset-by-asset basis.
  2. Section 179 expensing can be used when a taxpayer is required to use ADS where bonus depreciation is disallowed.
  3. Bonus depreciation is only allowed on assets used 100% for business purposes. However, section 179 expensing is allowed to be used for property used 50 % or more of the time for business purposes in the same ratio as the business use percentage applied.
  4. Section 179 expensing is limited to taxable income. Bonus depreciation is not subject to this limitation and the deduction is allowed to generate a loss.

Action Steps: How to Plan

The biggest takeaways from these changes are:

  • The definition of qualified property has been modified and expanded. More capital expenditures may now qualify for a section 179 deduction or bonus depreciation.
  • Higher spending limits and deduction amounts could lead to larger deductions and write-offs for businesses’ real and tangible property expenses.
  • If Congress or the IRS clarifies whether or not certain depreciation schedules are going to be shortened, businesses may be able to claim write-offs for some of their expenses faster than they could before the TCJA.
  • Businesses will need to look at the rules for the new business interest expense deduction limitation to see how this deduction could be at odds with claiming a section 179 deduction or bonus depreciation.

Overall, using bonus depreciation is simpler than using section 179 expensing because there are no phase-out provisions, caps, or taxable income limitations with which to wrestle. For simplicity’s sake, many taxpayers may choose to forgo using the section 179 expensing rules while 100% bonus provisions are available.

Still have questions? Feel free to reach out and start a conversation with the Credits and Accounting Methods team at Cherry Bekaert to gain a further understanding of what options are available for your business. We’re happy to help you make sense of it all.