In December 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. This is the most comprehensive tax reform package in over three decades and it will have a major impact on how much income tax 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 2018. Here are the details.
If you need new plant equipment, want to upgrade your accounting software or decide to remodel your office, it can provide a sizable tax break. Generally, you must “capitalize” these purchases — in other words, spread the deductions for capital expenditures over several years.
But there are two tax breaks that allow you to accelerate these deductions for tax purposes, Section 179 and bonus depreciation. Although these deductions have been available in various amounts over the years, they’ve been expanded by tax reform.
First, the TCJA permanently increased the Sec. 179 expensing limit for qualifying fixed asset purchases from $510,000 in 2017 to +$1 million in 2018. However, this break is phased out for qualifying purchases more than $2.5 million in 2018 (up from $2.03 million in 2017). Going forward, these amounts will be indexed for inflation.
Sec. 179 expensing for fixed asset purchases is phased out on a dollar-for-dollar basis for purchases that exceed the threshold amount. So, no Sec. 179 deduction is available if your total investment in qualifying property is above $3.5 million for 2018.
What types of assets qualify for Sec. 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 Sec. 179 to include roofs, HVAC equipment, and fire protection and security systems.
With the permanent extension of the increased Sec. 179 expensing limit, you can now plan your annual capital expenditure budget with more certainty. Say you’re thinking of spending up to $1 million this year on qualifying fixed assets such as those listed above. If so, you might want to make purchases and place the assets in service before the end of 2018.
The second expanded tax break for capital expenditures is bonus depreciation. Under the old rules, businesses were able to deduct 50% of qualified property additions in the first year of service for 2017.
Under the TCJA, companies are able to fully deduct capital expenditures made after September 27, 2017, and no later than December 31, 2022.
Unlike Sec. 179, bonus depreciation isn’t 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 Sec. 179 expensing.
Unfortunately, the bonus depreciation breaks will sunset, starting in 2023, as follows:
- 80% for qualifying property placed in service after December 31, 2022, and before January 1, 2024,
- 60% for qualifying property placed in service after December 31, 2023, and before January 1, 2025,
- 40% for qualifying property placed in service after December 31, 2024, and before January 1, 2026, and
- 20% for qualifying property placed in service after December 31, 2025, and before January 1, 2027.
For certain property with a longer production period and certain aircraft, the beginning and end dates in the list above increase by one year.
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.
We Can Help
The potential tax savings with Sec. 179 expensing and bonus depreciation are significant and the rules are complex. Consult with your Elliott Davis tax advisor for more details on how you can take full advantage of these taxpayer-friendly opportunities to grow your business.
Sidebar: Got Company Cars?
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:
- $10,000 for the first year the asset is in service, ($18,000 if bonus depreciation claimed)
- $16,000 for the second year,
- $9,600 for the third year, and
- $5,760 for the fourth and later years.
These amounts are indexed for inflation annually after 2018. For vehicles claimed with bonus first-year depreciation, the maximum additional first-year depreciation allowance remains at $8,000.