CFOs Face Tough Decisions under Newly Expanded Depreciation Rules
posted Mar 8, 2018 by Jade M. Toher CPA, MST in the Global Tax Blog
Many CFOs put capital expenditures on the back burner in 2017, because they were expecting Congress to pass legislation that would offer more generous depreciation tax breaks. And the Tax Cuts and Jobs Act (TCJA) does, indeed, provide instant tax gratification for acquiring qualified business property in 2018: Due to changes in Section 179 and bonus depreciation, a business may be able to deduct the full cost of property placed into service during the year.
Though this one-two punch is hard to beat, the modified provisions aren’t, by any measure, easy to explain or understand. With various tax law changes pulling business owners in opposite directions, CFOs face some difficult and complex decisions in 2018. Furthermore, the hastily crafted legislation has created some unintended results that are likely to be rectified in technical corrections later this year.
Here are some important issues to consider before investing in property, plant or equipment:
Qualified leasehold improvements. Suppose a lessee wants to expand office space through improvements in a new building. Prior to the new tax law, qualified leasehold improvements weren’t eligible for the faster 15-year write-off period if the building hadn’t been placed in service at least three years before the improvements. Under the new law, leasehold improvements may be written off over 15 years, subject to technical corrections that haven’t been enacted yet.
Luxury cars. Previously, the Section 179 limits on “luxury cars” curtailed vehicle purchases. However, the new tax law dramatically increases the deductions for passenger vehicles. For instance, the maximum first-year deduction limit for a vehicle placed into service in 2018 is $10,000 based on 100% business use (up from $3,160 in 2017); plus, you can add bonus depreciation of $8,000 in qualified circumstances. These favorable changes might encourage a company to acquire a fleet of cars.
Heavy-duty SUVs. Similarly, a company may acquire heavy-duty SUVs for business driving purposes. Generally, Sec. 179 caps the deduction for a vehicle weighing more than 6,000 pounds at $25,000. But if your company buys a qualified SUV, the purchase now qualifies for 100% bonus depreciation, further increasing first-year write-offs for these vehicles.
Alternative bonus depreciation election. Also, keep in mind that bonus depreciation applies to property placed in service after September 27, 2017, but 50% bonus depreciation may be elected for a tax year ending after this date. Depending on current and future expected tax liabilities, including corporate alternative minimum tax (AMT) implications for 2017, this approach may be preferable.
The Bottom Line?
These examples are just the tip of the iceberg. Companies should also factor in new limits on business interest deductions, alternative depreciation system (ADS) schedules and the interplay of the various depreciation provisions in the tax code.
Before hiring a contractor to remodel your office, adding a new luxury vehicle or making any other major capital investment, it’s a good idea to discuss your situation with one of our tax professionals. We understand the ins and outs of the new tax law and can help you make tax-smart strategic investments.