Purchases of equipment, vehicles and other business property that is not buildings and real estate are eligible for more rapid write-offs. These rules are changed on a regular basis so for the most part this is just an adjustment of how fast things can be written off. The two area we will discuss are bonus depreciation and expensing of items (Section 179). We will also discuss several reasons why taking advantage of these may not always minimize taxes.
Bonus Depreciation, Also Known as Section 168 Deductions
- Through September 27, 2017 businesses were able to immediately deduct 50% of eligible costs associated with qualifying equipment additions. This did not apply to purchases of used property.
- Beginning September 28, 2017 businesses are able to immediately deduct 100% of eligible costs associated with qualifying equipment additions. This does now apply to purchases of used property.
- There is an option to elect 50% bonus depreciation or no bonus depreciation instead of 100%.
- This 100% amount will be reduced to 80% beginning January 1, 2023 and wind down to 0% by January 1, 2028.
- Bonus depreciation can be used when a business has losses.
Expensing of Depreciable Assets, Also Known as Section 179 Deductions
- Through calendar year 2017 and any fiscal year ending in 2018 the Section 179 rules allowed expensing for up to $510,000 of eligible property placed in service. The $500,000 of expensing was phased out when cumulative eligible purchases exceeded $2,030,000. This did apply to purchases of used property, and commercial rental property but did not apply to any residential rental property.
- Beginning with calendar year 2018 and any fiscal year ending in 2019 the Section 179 rules allow expensing for up to $1,000,000 of eligible property placed in service. The $1,000,000 of expensing is phased out when cumulative eligible purchases exceeded $2,500,000. This will now apply to used property, commercial rental property and to residential rental property. It also includes a broad category of qualified improvement property that includes interior improvements to commercial properties including: roofs, HVAC systems, fire protection and alarm systems, and security systems.
- Section 179 cannot be used to reduce taxable income below zero. So it cannot be used when a business has a loss.
State Conformity to Federal Rules
States have the option of conforming to federal depreciation rules or not. Many states do not accept bonus depreciation. More states conform to the Section 179 rules but not all. States that do not conform on Section 179 often use a limit for Section 179 of $25,000. When a different federal and state method are used the difference must be maintained over the life of the asset’s depreciable life.
Since more states conform to Section 179 rules it may be easier to use those rules than the bonus depreciation rules to minimize income taxes and to reduce recordkeeping for federal to state differences.
Net Operating Losses
One other consideration in choosing a depreciation method is that the new tax law net operating loss carryover rules reduce the value of those losses. For this reason creating a large loss with bonus depreciation may not minimize future taxes. In some cases electing out of some or all bonus depreciation may reduce future tax obligations. See our blog post on net operating losses.
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About the Authors
Bruce Mayer, MBA, CPA currently serves as a Partner in the Assurance Department, working primarily on audits and tax returns of cooperatives, nonprofits, employee benefit plans and commercial businesses. Bruce performs audits of all kinds and provides consulting services on taxation of nonprofits and cooperatives. Bruce enjoys helping clients solve problems and providing clients advice on accounting and tax strategies that meet their needs.
Kyle Schaaf is a Manager in Wegner CPAs’ Assurance Department. Since joining the firm in June 2010, he has worked on the audit staff performing tax return preparation, financial statement and compliance audits of a number of different not-for-profit organizations. Kyle has also worked on for-profit engagements, specifically cooperatives, and therefore has knowledge and experience working with a variety of organizations.