The Tax Cuts and Jobs Act of 2017 made various changes that prove to be favorable while deducting business equipment and vehicles. Section 179 and Bonus Depreciation is helping business and economy grow through investments. Read about the impact on small and pass-through business. While designing a strategy for your business budget for the year 2018, you should keep all these changes in mind. So let’s take a look at what these changes actually are.
Section 179 Deductions
Now you have the option to deduct various costs related to equipment and property rather than depreciating it over the recovery period. In case of properties placed in service from January 1, 2018, you can deduct the maximum expenditure of $1 million instead of $500,000 that was before these changes were made. This dollar limit eliminates the dollar-for-dollar when your total purchases exceed $2.5 million for the entire year. That being said, as the total purchases exceed $3.5 million, you can no longer make any further expenses.
In case if you purchase a heavy SUV, the dollar limit will remain at $25,000, and in case of inflation, the $1 million, $2.5 million, and $25,000 limits will be adjusted annually after 2018.
Now you might be wondering which properties can now be deducted or expensed? These properties include any tangible personal property, like furniture and appliances, that are mainly for the purpose of furnish lodging, modifications to nonresidential real properties such as ventilation, fire-protection, air-conditioning, alarm and security systems, heating, etc., and qualified improvement property. Read about new depreciation rates.
For the purpose of accelerating the depreciation, the new rule provides a first-year allowance known as Bonus Depreciation. Before the new rules were put into place, various percentages were applied to the cost of purchased items, but under the new rule, for the properties placed in service after 27 September 2018, through 2022, the percentage has been set at 100%. For the first tax year ending after 27 September 2018, you can opt to use 50% of your allowances. In 2023, this 100% allowance will then reduce to 80%, in 2024 – 60%, in 2025 – 40%, in 2026 – 20%, and after 2026 – 0%. In case of properties with longer production, there is a provision for certain extra years.
It is important to know which properties qualify for the bonus depreciation. The new rule qualifies new properties as well as pre-owned properties for the bonus depreciation, unlike the earlier rule which only qualified new properties for the bonus depreciation. The new rule also includes qualified films, television, and live theatrical production costs, in the qualifying properties.
For the year 2017, the depreciation limit for cars is $3,160, or $11,160 if bonus depreciation is used. For light trucks and vans, the depreciation limit is $3,560, or $11,560 if bonus depreciation is used. For the vehicles placed in service in 2018, the annual depreciation cap has been increased as per the new rule. For the first year, the depreciation cap will be $10,000, or $18,000 in case the bonus depreciation is used, $16,000 for the second year, $9,600 for the third year, $5,760 for the later years.
If a vehicle is purchased and placed in service before 28 September 2017, a bonus depreciation amount of $6,400 will apply, and if a vehicle is purchased and placed in service after 27 September 2017, a bonus depreciation amount of $8,000 will apply. In case of passenger vehicles with a gross weight of 6000-14000 pounds, there is no dollar limit on depreciation for other vehicles. Even if there is a $25,000 dollar limit on expensing, you can still deduct the entire cost of the vehicle in the first year of purchasing and placing in service.
You can write off the cost of qualified improvement property over a period of 15 years. In case of property placed in service after 31 December 2017, the recovery period has been reduced from 7 years to 5 years for certain farm machinery and equipment.
So, get in touch with your CPA today or take an advice from a tax expert, and plan your business expenditure for 2018 as per the new rules and regulations. If you are schedule C filer then learn about incorporating or not? Interested in learning about impacts of new laws then read about how the new law is affecting individuals.