Tax Cuts and Jobs Act – New Depreciation and Expensing Rules and Limitations

The Tax Cuts and Jobs Act brings significant tax law changes for the 2018 tax year and beyond. One key area to focus your attention is the new rules and limitations for depreciation and expensing. Key changes include:

  • An increase to the maximum section 179 property deduction
  • A temporary increase to the bonus depreciation deduction
  • Changes to depreciation limitations on luxury automobiles and personal use property
  • A shortened recovery period for certain farm equipment and property
  • New recovery periods for certain real property
  • The use of alternative depreciation system for farming businesses

Section 179 Property

Section 179 Prior to the Tax Cuts and Jobs Act, taxpayers could elect to expense up to a maximum $500,000 for the cost of any section 179 property and elect to deduct it in the year the property was placed in service.

For tax years beginning after December 31, 2017, the maximum deduction has increased to $1 million. The Tax Cuts and Jobs Act also expanded the definition of section 179 property for tax years beginning after December 31, 2017 to include certain improvements made to nonresidential property after the date the property was first placed into service. This change includes qualified improvement property (any improvement to a building’s interior), roofs, HVAC, fire protection systems, alarm systems and security systems. Improvements that are attributable to the enlargement of a building, any elevator or escalator or the internal structural framework of the building do not qualify for the expanded section 179.

Bonus Depreciation

Bonus depreciation differs in some important ways from Section 179 depreciation. Primarily, bonus depreciation is not subject to the annual dollar limitations imposed on Section 179 depreciation and it is not limited to the profits of the business. Prior to the Tax Cuts and Jobs Act, bonus depreciation could only be used for new property that was not previously used by anyone.

Under the pre-TCJA rules, a taxpayer could elect to expense bonus depreciation of 50% of the cost of qualified property acquired that was placed in service during the tax year. For qualified property acquired prior to September 28, 2017 and placed in service before January 1, 2018, the percentage of bonus depreciation remains 50% and the property must be new property, never used before by anyone.

The Tax Cuts and Jobs Act has increased the bonus depreciation percentage to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. For property acquired after January 1, 2023, the bonus depreciation percentages will start to phase out and eventually be eliminated for all property acquired after December 31, 2026. However in the meantime property eligible for 100 percent bonus depreciation has been expanded to include both new and used qualified property acquired and placed in service after September 27, 2017 as long as certain conditions are met:

  • The taxpayer didn’t use the property at any time before acquiring it
  • The taxpayer didn’t acquire the property from a related party
  • The property has a useful life of 20 years or less which would includes most personal property, but not include real property
  • The taxpayer didn’t acquire the property from a component member of a controlled group of corporations
  • The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor
  • The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent

The Tax Cuts and Jobs Act also expanded the definition of qualified property eligible for 100% bonus depreciation to include qualified film, television and live theatrical productions that were placed in service after September 17, 2017.

Depreciation Limitations on Luxury Automobiles and Personal Use Property

Prior to the Tax Cuts and Jobs Act, dollar limitations were placed on the depreciation and section 179 deduction that could be taken for passenger automobiles. Limitations remain for tax years starting after December 31, 2017, but have increased significantly.

    1st Tax Year     2nd Tax Year   3rd Tax Year         Each                Succeeding             Year
2017 Limits for Passenger Automobiles*         $3,160         $5,100       $3,050       $1,875
2018 Limits for Passenger Automobiles*       $10,000        $16,000       $9,600       $5,760

*Bonus depreciation does not apply

Shorter Recovery Periods for Certain Farm Equipment and Property

Prior to the Tax Cuts and Jobs Act, machinery and equipment used in a farming business was classified with a recovery period of 7 years.  The TCJA has shortened the depreciation period for machinery and equipment used in a farming business to 5 years as long as the property was acquired after December 31, 2017. The TCJA also removed the requirement that the 150% declining balance depreciation method (rather than the 200% declining balance method available to other businesses) had to be used or farm equipment and machinery.