Section 179 and Bonus Depreciation under TCJA

by Maly Sevilla, CPA

The Tax Cuts and Jobs Act (TCJA) changed some of the most used deductions for purchases of qualified property. Code sections 179 and 168(k) (bonus depreciation) allow for the immediate deduction of part or all of the cost of qualified property. The TCJA favorably changes the limits for the deductions allowed under both of these code sections.

The TCJA increased the deduction for bonus depreciation from 50% to 100% and extended the period of phase-out. A 100% first year deduction is allowed for qualified property placed in service after September 27th, 2017 and before January 1st, 2024. The deduction will start phasing out in 2024 going down to 80%, with a decrease of 20% for each year after that, until it phases out completely in 2026.

The TCJA increased the maximum annual section 179 deduction from $500,000 to $1 million. This applies to qualified property placed in service after December 31, 2017. The new law increased the annual phase-out threshold from $2 million to $2.5 million. Thus, the deduction begins to phase out dollar-for-dollar after $2,500,000 is spent on qualified property.

The definition of qualified real property eligible for code section 179 expensing is also expanded by the new law to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Most states decouple from the federal laws that cover the deductions mentioned above. Some states eliminate these deductions all together and opt for a more traditional depreciation deduction. Others, however, allow a portion of these deductions and allow the rest of the cost to be deducted through depreciation deductions. Some states are still deciding what approach they will choose in regards to the TCJA and these deductions.

The TCJA is a sweeping tax act that changed many sections of the law. These changes and the related state conformity should be taken in to consideration when planning for 2018 and beyond. Please contact us to if you have any questions.