Tax reform – the Tax Cuts and Jobs Act signed into law in December 2017 – provided a variety of tax savings for business owners for your 2018 taxes and future years, and one of the more interesting benefits involves property ownership. Whether you run your business out of the house or have a larger company with employees, you’ll want to visit with your tax professional to figure out if it makes sense to invest in depreciable property as a way to reduce taxable income and save tax dollars.
Here are three depreciation benefits for review:
1. Bonus Depreciation
Congress increased bonus depreciation from 50 percent to 100 percent for property placed in service after Sept. 27, 2017. Generally, bonus depreciation applies to personal property, such as furniture and equipment, and now, used property also qualifies for the deduction.
You can only elect out of bonus depreciation on an asset class basis and must attach an election statement to do so. Bonus depreciation will not begin phasing down until 2023 under the following schedule:
- 100 percent for property placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
- 80 percent for property placed in service during calendar year 2023.
- 60 percent for property placed in service during calendar year 2024.
- 40 percent for property placed in service during calendar year 2025.
- 20 percent for property placed in service during calendar year 2026.
One thing to remember: be careful claiming bonus depreciation if you cannot fully utilize the deduction or benefits in the current year because your company is in a loss situation. Net operating losses need to be carried forward, and the self-employment tax doesn’t allow for loss carryovers.
In addition, bonus depreciation may reduce your 20 percent qualified business income deduction, but could also take you below the phase-out threshold (and thereby allow for a greater deduction), so plan accordingly.
2. Section 179 Expensing
Congress doubled the Section 179 limit from $500,000 in prior years to $1 million in 2018 and beyond for qualified property. The annual phase-down threshold based on investment increased from $2 million to $2.5 million.
The Section 179 deduction allows for more flexibility than bonus depreciation because you are able to pick and choose the assets and amounts versus an all-or-nothing approach required of bonus depreciation (per asset class). However, remember that the 179 deduction is limited to business income and recaptured if the business use percentage drops below 50 percent.
Under the current law, qualified real property eligible for Section 179 was expanded to include personal property used predominantly to furnish lodging. Examples include beds, furniture, refrigerators, ranges, roofs, HVAC property, fire protection, alarm systems and security systems. To qualify, these items must be placed in service after the date the nonresidential real property was placed in service.
It’s important for all small business owners to consider purchasing assets and taking advantage of the first-year deductibility, which thereby reduces your taxable income. Also consider whether you can afford to buy the asset, is there enough cash flow in the business and should you finance the asset?
3.Luxury Auto Limits
Another boon in deprecation involves the automobile depreciation limits, which almost tripled under the new law. As a reminder, the word “luxury” isn’t just related to high-end models; it applies to almost all four-wheeled vehicles that drive on public roads and weigh less than 6,000 lbs.
Here are the auto limits beginning in 2018 under the new law. Remember to add $8,000 to the first-year amounts when bonus depreciation is taken. Any depreciation that is not allowed because of these annual limitations is allowed once the vehicle reaches the end of the depreciation schedule, but is still subject to certain limits:
- $10,000 year one (was $3,160 under prior law).
- $16,000 year two (was $5,100 under prior law).
- $9,600 year three (was $3,050 under prior law).
- $5760 years four through six (was $1,875 under prior law).
In addition, consider whether you want to buy or lease an automobile. Leased vehicles are not depreciated, but you can deduct the lease payments. When the value of the leased vehicle is above a certain amount, you’ll need to subtract an “income inclusion” amount, which is intended to equalize the tax benefits from leasing and owning business vehicles.
Consult Your Tax Professional
If all this talk about depreciation is making your head spin, don’t fret! Set up a meeting with your CPA or tax accountant to carefully review your options. You’ll be glad you did.
Editor’s note: Portions of this article were originally published in AccountingWEB.