By Ryan Redleski, CPA
The new tax legislation will have a major impact on how much income taxes manufacturers and distributors will pay in 2018. And there’s good news: In addition to lowering business tax rates, the new law significantly expands the tax breaks for capital expenditures.
As a result, you may be able to save big tax dollars on purchases of fixed assets and property improvements that you make before the end of this year. There are two tax breaks that allow you to accelerate these deductions for tax purposes: Bonus Depreciation and Section 179. Although these deductions have been available in various amounts over the years, they’ve been expanded by tax reform. Here are the details.
Under the old rules, businesses were allowed to deduct 50% of qualified property additions in the first year of service for 2017. Under the TCJA, companies are now allowed to fully deduct, 100%, of capital expenditures made after September 27, 2017, and no later than December 31, 2022.
Bonus depreciation is not subject to any spending limits or phase-out thresholds. In addition, the new law expands the break to include new and used property, removing one of bonus depreciation’s former disadvantages compared to Section 179 expensing.
Like a lot of the changes made in TCJA, Bonus depreciation will sunset, meaning that it phases down to zero from 2023 to 2027, with no bonus depreciation available in 2028. Details as follows:
Qualifying property generally includes Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less, computer software and qualified improvement property. In addition, special rules apply to vehicle purchases and certain real property.
In the past, some corporations chose to accelerate their alternative minimum tax (AMT) credits instead of taking bonus depreciation for assets they acquired. However, that option is no longer available under the new law, because the TCJA repeals the corporate AMT.
TCJA permanently increased Section 179 expensing limit for qualifying fixed asset purchases from $510,000 in 2017 to $1 million in 2018 and beyond. Although, this break is phased out for qualifying purchases over $2.5 million in 2018 (up from $2.03 million in 2017). Therefore no Section 179 deduction is available if your total investment in qualifying property is above $3.5 million for 2018, as this is a dollar for dollar phase-out. However, the IRS does look at the phase-out amounts annually, in which they are indexed for inflation.
What types of assets qualify for Section 179? Examples of assets that are eligible include machinery, equipment, vehicles and furniture. The TCJA also expands the leasehold improvement property that’s eligible for Section 179 to include roofs, HVAC equipment, and fire protection and security systems.
Many small and midsize manufacturers provide company cars for their owners and salespeople. However, the deduction for luxury passenger automobiles is limited for federal income tax purposes. Under the new tax law, the limits for vehicles placed in service after December 31, 2017, are:
These amounts are indexed for inflation annually after 2018. For vehicles for which bonus first-year depreciation is claimed, the maximum additional first-year depreciation allowance remains at $8,000.
The potential tax savings with Bonus Depreciation and Section 179 are significant, but the rules can be complicated. Consult with your tax advisor for more details on how you can take full advantage of these taxpayer-friendly opportunities to grow your business.