Many business owners, especially in the manufacturing sector, were pleased that the Tax Cuts and Jobs Act (TCJA) expanded the first-year bonus depreciation and the first-year Section 179 deductions. These two tax breaks are lucrative for capital-intensive manufacturers, who can benefit from the tax-saving opportunities due to the time value of money. Both allow you to accelerate deductions for qualifying purchases of property, plant and equipment. Here are how the two deductions generally work and why it is beneficial that both exist.

Bonus depreciation deduction

Businesses can deduct 100% of the cost of certain assets in the first year they are placed in service under the improved bonus depreciation program. This Federal tax break applies to qualifying new and used assets placed in service between September 28, 2017, and December 31, 2022. Unless the bonus deprecation program is modified by Congress, starting in 2023 the percentage is reduced by 20% per year as follows:

  • 80% for property placed in service in 2023
  • 60% for property placed in service in 2024
  • 40% for property placed in service in 2025
  • 20% for property placed in service in 2026
  • 0% for property placed in service after 2027 and future years.

Most categories of tangible depreciable assets, other than real estate, qualify for this break. Additionally, special rules apply for longer production period property, certain aircraft and business vehicles.

Sec. 179 deduction

The second option is for a business to elect to expense the cost of any Section 179 property and deduct it in the year the property is placed in service. The TCJA expanded the Sec. 179 deduction for qualifying assets placed in service in tax years beginning in 2018 and beyond. The maximum Sec. 179 deduction is $1.02 million for 2019, which increases each year for inflation.

The TCJA also expanded the definition of qualifying assets for Sec. 179 deductions to include:

  • Depreciable tangible personal property used mainly in the furnishing of lodging (such as furniture and appliances),
  • Qualified Improvement Property (except improvements to enlarge a building, elevators or escalators, and the internal structural framework of a building), and
  • Roofs, HVAC equipment, fire protection systems, and alarm and security systems for nonresidential real property.

Unfortunately, the Sec. 179 deduction is phased out for larger businesses or businesses that have a large number of fixed asset additions during a tax year. The deduction begins to be phased out if your qualified asset purchases for the year exceed $2.55 million for 2019, this is also adjusted annually for inflation.

Another limitation of Sec. 179 expensing is that the deduction is limited to the taxable income from a taxpayer’s active trades or businesses. In simple terms, this means that Sec. 179 expense cannot create or increase an overall tax loss for the business. If Sec. 179 is taken in a year when a taxpayer has an overall tax loss, the deduction will be suspended, and it can be carried forward to future years where there will be taxable income.

Why does it matter which method is used?

Every business is unique, and your tax professional can discuss whether bonus depreciation, Sec. 179 expensing, regular Modified Accelerated Cost Recovery System (MACRS) depreciation or a combination of these methods make the most sense for your business. The availability of the two deductions provides greater flexibility than simply bonus depreciation alone.

Generally, when both 100% first-year bonus depreciation and the Sec. 179 deduction privilege are available for the same asset, taxpayers should claim 100% bonus depreciation since there are no limitations on that method.

In certain situations, Sec. 179 expensing can be advantageous when:

  • the business files in states allowing section 179 expense but limits bonus depreciation;
  • it can be used to fine-tune annual deductions;
  • it does not cause uniform capitalization (UNICAP) problems;
  • it includes qualified improvement property that is not eligible for bonus depreciation.

What about business vehicles?

The TCJA expanded the first-year tax breaks for qualifying business vehicles. Larger vehicles such as heavy Sport Utility Vehicles (SUVs), trucks and vans are treated as transportation equipment and are not subject to the same limitations as cars and light SUVs. To qualify for 100% bonus depreciation and the higher levels or section 179 expense, these vehicles must be used over 50% for business purposes and have a manufacturer’s gross vehicle weight rating above 6,000 pounds.

New and used passenger vehicles that do not qualify for the exception above, may be eligible for the following maximum annual depreciation deductions if acquired and placed in service in 2019 (and indexed for inflation).

  • $10,100 for 2019 (or $18,100 if you claim first-year bonus depreciation),
  • $16,100 for 2020,
  • $9,700 for 2021, and
  • $5,760 for 2022 and thereafter until the vehicle is fully depreciated.

We are here to help you consider whether bonus depreciation, Sec. 179 expensing, regular MACRS depreciation or a combination of these methods make the most sense for your business. While there is no right answer for everyone, the TCJA provides a lot of flexibility in deducting purchases of property, plant and equipment.

CONTACT US to discuss more.

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