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New depreciation rules for 2018

By Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs

Businesses can immediately expense more under the new law. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new tax law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

  • Qualified improvement property, which means any improvement to a building’s interior. Improvements do not qualify if they are attributable to: the enlargement of the building, any elevator or escalator or the internal structural framework of the building.
  • Roofs, HVAC, fire protection systems, alarm systems and security systems are now subject to 179 expense.

These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.

 

Temporary 100% expensing for certain business assets (first year bonus depreciation)

The new law increases the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Dec. 21, 2017, and before Jan. 1, 2023.

The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if all the following factors apply (old rule was the qualified property had to be new versus used property):

  • 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 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.

 

Depreciation limitations on luxury automobiles and personal use property

The new law changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

 

If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is:

  • $18,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

 

Changes to treatment of certain farm property

The new law shortens the recovery period for machinery and equipment used in a farming business from seven to five years. This excludes grain bins, cotton ginning assets, fences or other land improvements. This recovery period is effective for property placed in service after Dec. 31, 2017.

 

Now is the time to plan

Now is the time to be thinking how the new depreciation laws will impact your 2018 tax planning. Many other changes occurred as well that may impact your overall planning to minimize taxes; therefore, be sure to contact your tax advisor so you are taking advantage of all the new tax law offerings.

 

Information for this article was obtained from IRS Fact Sheet 2018-9.

Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com or at BRavencraft@HolbrookManter.com.

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One comment

  1. Stunning, Thanks for the excellent outline. Keep up the good work.

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