The 2017 Tax Cuts and Jobs Act enhanced federal tax deductions for the purchase or improvement of certain assets used in a business. This article discusses changes to bonus depreciation and Section 179 asset expensing, as well as a refresher on repair capitalization, that will generate tax savings for many of our business clients!
The 2017 Tax Cuts and Jobs Act significantly enhanced federal tax deductions for business assets like furniture, fixtures, equipment, software, land improvements, and certain real property improvements. This is great news that will translate to tax savings for many of our clients! Among the most important enhancements are changes to bonus and Sec. 179 depreciation, discussed below.
Note the content here is for federal tax purposes only. California treats these rules differently, and therefore requires separate analysis.
Effective September 28, 2017, bonus depreciation now allows for a 100% immediate deduction of eligible property, up from 50%. Property that qualifies for bonus depreciation includes tangible personal property like furniture, fixtures, equipment, land improvements, and off-the-shelf software used in a trade or business. Additionally, used property is now bonus eligible, previously only new property qualified. There is no annual limit on the amount of bonus depreciation a business can deduct.
Section 179 expensing:
Effective January 1, 2018, the new annual limit for Sec. 179 expense is $1,000,000, up from $510,000. Assets eligible for immediate expensing under Sec. 179 include tangible personal property like furniture, fixtures, equipment, etc., off-the-shelf software, and qualified real property (QRP). QRP is any improvement to an interior portion of a nonresidential building—not including building enlargement, elevators, escalators, or structural framework. QRP also includes roofs, HVAC, fire protection and alarm systems, and security systems.
The beginning of the phaseout window for 179 eligibility has increased to $2,500,000, up from $2,030,000. This means that your Sec. 179 deduction is reduced dollar for dollar once your business acquires $2,500,000 or more of 179-eligible assets during the year.
“BAR” rules for capitalizing repairs and improvements:
The tax law requires that repairs and improvements to business property must be capitalized under certain conditions. To capitalize means the expenditure is not deducted in full immediately, but is depreciated over time.
To determine when a repair or improvement must be capitalized, a handy trick is to remember the phrase “the BAR isn’t so high.” If an expenditure is a Betterment, Adaptation, or Restoration (“BAR”) of business property then it generally must be capitalized. The “BAR” rules apply to any tangible property used in a business, both personal and real property.
Betterments include material additions (i.e. physical enlargement) to the property, or expenditures that materially increase an asset’s productivity, efficiency, strength, quality, or output. Adaptations are amounts paid to adapt the property to a new or different use. Restorations include replacement of a major component or substantial structural part of the property, or returning the property to operating condition when no longer functional.
Special rules such as bonus depreciation and Sec. 179 allow for full expensing regardless of capitalization. Expenditures below $2,500 that would otherwise be capitalized under the “BAR” criteria may be expensed in full immediately under a de minimis safe harbor if elected.
While these concepts—bonus, Sec. 179, repair capitalization, de minimis safe harbor—are foundational to tax planning for asset expenditures, they are just the tip of the iceberg. Every situation must be analyzed separately to consider the myriad rules and caveats that exist in this area of tax law.
If you have any questions regarding these or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.