Co-authored by Ross Walker, Senior Accountant
The TCJA has yielded several tax-saving opportunities for the manufacturing and distribution industry. Due to the time value of money, it’s critical that business owners capitalize on these occurrences with a sense of urgency. Two especially lucrative breaks for capital-intensive manufacturers under the Tax Cuts and Jobs Act (TCJA) are the expanded first-year bonus depreciation deduction and the first-year Section 179 deduction. Both allow you to accelerate deductions for qualifying purchases of property, plant and equipment. Here’s what you should know.
First-year bonus depreciation deduction
Under the new-and-improved bonus depreciation program, businesses can deduct 100% of the cost of certain assets in their first year of service . This federal tax break applies to qualifying new and used assets placed in service between September 28, 2017, and December 31, 2022. With each subsequent year, the bonus depreciation percentage is reduced by 20%, before fully phasing out in 2026 (Note: these deadlines are extended for certain assets with longer production periods and aircraft).
Certain vehicles placed in service after December 31, 2017, and used over 50% for business, are not excluded from the increased deduction provided by first year bonus depreciation. New and used passenger vehicles are eligible for an $18,000 depreciation deduction if you claim first-year bonus depreciation. Heavy SUVs, pickup trucks and vans, which are treated as transportation equipment, qualify for 100% first year bonus depreciation. To qualify, heavy vehicles must have a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds.
Aside from real estate, most categories of tangible depreciable assets qualify for this break. Congress also intended for qualified real estate improvement property, (QIP) placed in service after 2017, to be eligible for bonus depreciation. QIP includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, due to a drafting error, QIP placed in service after 2017 maintains a 39-year Modified Accelerated Cost Recovery System (MACRS) recovery period, as under prior law. Therefore, QIP is ineligible for bonus depreciation, unless Congress passes a technical correction..
Sec. 179 deduction
Alternatively, your business can elect to expense the cost of any Sec. 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 (up from $1 million for 2018, thanks to the annual inflation adjustment).
The TCJA also expanded the definition of qualifying assets for Sec. 179 deductions to include depreciable tangible personal property and QIP (with certain exceptions). Additionally, roofs, HVAC equipment, fire protection systems, and alarm systems for nonresidential real property are now included under the definition of qualifying assets for Sec. 179.
There’s an important caveat regarding this deduction.: The Sec. 179 deduction is phased out for larger businesses. The deduction phases out if your qualified asset purchases for the year exceed $2.55 million for 2019 (up from $2.5 million for 2018). Sec. 179 limits and phaseouts are adjusted annually for inflation.
Sec. 179 expensing is limited to taxable income from a taxpayer’s active trades or businesses. That means that Sec. 179 deductions can’t create or increase an overall tax loss for the business. Any amount that cannot be currently deducted because of the taxable income limit can be carried forward until it is fully deducted.
Which is right for you?
When both the 100% first-year bonus depreciation and the Sec. 179 deduction privilege are available for the same asset, 100% bonus depreciation should generally be claimed, because there are no limitations on that break.
However, in some situations, Sec. 179 expensing can be advantageous. For example, it can be used to fine-tune annual deductions, doesn’t cause uniform capitalization (UNICAP) problems, and covers certain improvements to nonresidential real property that aren’t eligible for bonus depreciation. The availability of the two deductions provides greater flexibility than just bonus depreciation alone.
Weigh your options
A VonLehman tax professional can discuss whether bonus depreciation, Sec. 179 expensing, regular MACRS depreciation, or a combination of these methods makes the most sense for your business. Each situation is unique, and the TCJA provides a great deal of flexibility in deducting purchases of property, plant and equipment.