Tax Reform Update: Details of the Cost Recovery Provisions
posted Jan 26, 2018 by Norman LeBlanc, CPA in the Global Tax Blog
Business owners have been eagerly waiting for Congress to deliver on tax reform. A few weeks ago, the House and Senate finally reached a conference agreement that lowered taxes for most businesses. In addition to reducing the top corporate tax rate from 35% to 21%, the Tax Cuts and Jobs Act (TCJA) offers significant incentives to encourage businesses to invest in equipment and staffing.
Here are the details of the capital expensing provisions of the TCJA. Some of these incentives go into effect for qualifying property placed in service after September 27, 2017 — others begin on January 1, 2018.
The TCJA temporarily allows companies to fully deduct certain capital expenditures in the year they’re placed in service. This break essentially replaces the current 50% first-year bonus depreciation program. The new-and-improved rules:
- Allow companies to deduct 100% of the cost of qualifying property in the first year it’s placed in service (although businesses would still be temporarily allowed to elect a deduction of 50% in the first tax year, if they don’t want to fully deduct property in the year of acquisition),
- Include new and used qualifying property (defined further below),
- Are not subject to any spending limits or income-based phaseout thresholds, and
- Are effective for qualifying property placed in service after September 27, 2017, and before January 1, 2023.
Similar to the current bonus depreciation program, this deduction would gradually be phased down after five years to:
- 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 are increased by a year.
Qualifying property generally includes 1) tangible assets with an applicable tax recovery period of 20 years or less, 2) computer software and 3) qualified improvement property.
In terms of passenger automobiles, the tax act increases the current depreciation limits for vehicles placed in service after December 31, 2017, as follows:
- $10,000 for the first year the asset is placed in service,
- $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.
The tax act permanently increases the Section 179 deduction from $500,000 to $1 million annually and increases the asset acquisition phaseout threshold from $2 million to $2.5 million. Both amounts are to be adjusted annually for inflation. More assets qualify for the Sec. 179 deduction under the new law, including property used predominantly to furnish lodging and various nonstructural improvements to commercial property (such as roofs, HVAC equipment, and fire and security systems). These changes go into effect for assets placed in service after December 31, 2017.
New Real Property Rules
Under current law, the cost recovery periods are 39 years for nonresidential real property and 27.5 years for residential rental property.
Under the tax act, qualified property improvements that are placed in service after December 31, 2017, would generally be depreciable over 15 years using the straight-line method, which qualifies them for Section 179 and bonus depreciation deductions. These depreciation methods apply regardless of whether the improvements are for property subject to a lease.
The new law includes many provisions that affect businesses, such as a 5-year write-off period for R&D expenses, a limitation on the deduction for business interest, and elimination of the domestic production activities deduction (DPAD).