Article written by:
Ashley Neel, CPA
A favorable provision in the Tax Cuts and Jobs Act (TCJA) is the increased expensing limits and phase-out threshold of Code Sec. 179. The new expensing limitations and phase-out threshold will go into effect for property placed in service after December 31, 2017 and will be indexed for inflation for tax years thereafter.
Under prior law, taxpayers are able to immediately expense up to $510,000 of the cost of qualified property placed in service after December 31, 2016. However, the $510,000 Section 179 expense deduction is reduced dollar for dollar for the amount of qualified property expenditures over $2,030,000 and is completely phased out when total qualified property expenditures are $2,540,000 or greater. Qualified property is tangible personal property purchased for use in trade or business which includes machinery and equipment, computers, “off-the-shelf” software, office furniture and qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property). Passenger vehicles are eligible for Section 179 expense; however, only to the extent of the dollar limitations in Code Sec. 280F. These limitations have generally made Section 179 expensing somewhat moot with respect to many passenger vehicles. Vehicles with a gross vehicle weight greater than six thousand pounds; however, are eligible to take up to $25,000 of section 179 expenses.
The Tax Cuts and Jobs Act (TCJA) includes a provision that expands the Code Sec. 179 expensing limitations and increases the phase-out threshold. Taxpayers are now able to expense up to $1,000,000 of the cost of qualified property under Code Sec. 179. This gets phased out dollar for dollar for the amount of total qualified property expenditures over $2,500,000 and Section 179 is completely phased out at $3,500,000 of expenditures. Also, the TCJA has expanded the definition of “qualified real property” to include improvements to nonresidential real property after the date the property was first placed in service, such as roofs, heating, HVAC property, fire protection, alarm systems and security systems. In addition, businesses are now allowed to expense “Qualified Improvement Property” which is defined as any improvement to an interior portion of a building that is nonresidential real property and does not include enlargement of the building, elevators, escalators or improvements to the internal structural framework of the building. Under the new rules, the Section 179 expense allowed to be taken on vehicles with a gross vehicle weight greater than six thousand pounds remains the same. In future years; however, the $25,000 limit will now be indexed for inflation. Passenger vehicles are also still allowed to take Section 179 expense to the extent of the limitations under Code Sec. 280F. However, these limitation have increased under the TCJA, and now may allow Section 179 to be more applicable to passenger vehicles (limitation is increased to $10,000 in year 1).
The new provisions for both bonus depreciation (discussed here – https://gbq.com/articles/the-tcja-temporarily-expands-bonus-depreciation/) and Code Sec. 179 provide strong incentives for businesses to invest in capital expenditures and improvements. While both provisions allow for accelerated deductions, there are a few important differences. The main difference is that Section 179 expense is subject to certain business income limitations (while bonus depreciation is not). Also, it is important to understand how different states vary in the treatment of both Section 179 and bonus depreciation.
Planning accordingly, now, will be essential to maximizing your tax benefits with these deductions. Please consult with your GBQ tax advisor for more information and guidance on how to optimally utilize these deductions.