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The Tax Cuts and Jobs Act (TCJA) also known as “tax reform” ushered in some new regulations regarding depreciation deductions which effectively lower the cost of acquiring capital assets through significant changes to the rules for bonus depreciation deductions, (IRS Code Section 179) as well as regular depreciation deductions for business property or that used in other income-producing activity.

The majority of tangible goods purchased by businesses qualify for Section 179 deductions. Section 179 of the tax code allows your business to write off the entire purchase price of qualifying equipment during the current tax year as long as it is put into use between January 1 and December 31 of the same tax year you are claiming it in.

Some examples of qualifying purchases include: office equipment, computers, off-the-shelf software, office furniture, personal property used in business (your deduction is based on the percentage of time you use personal property for business), and vehicles used for business with a gross weight of 6,000 pounds or more.

How these new depreciation deduction tax rules may benefit your business:

You can immediately claim more expenses under the new law. You can now elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service.

Improvements made to a business property now qualify as a deduction. The new definition of section 179 property includes improvements made to nonresidential real property after the date when the property was first placed in service as long as it is deemed “qualified improvement property” by the IRS and is placed in service in taxable years beginning after Dec. 31, 2017.

The law generally applies to any improvement to a building’s interior. There are some important exclusions including any improvements that: enlarge a building, add an escalator or elevator to it, or change structural framework of the building. Roofs, HVAC, fire protection systems, alarm systems and security systems are also excluded.

You can automatically expense your computer and other office hardware. Under the TCJA, expenses related to computers and peripheral equipment that were used in your business after 2017 (including in a home office) are no longer subject to the “more-than-50 percent” qualified business use test. They are now automatically eligible for Code Sec. 179 expensing.

There is an increased first-year bonus depreciation percentage. The new tax law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property acquired before Sept. 28, 2017 and placed in service before Jan. 1, 2018, remains at 50 percent. Special rules apply for property with a longer production period and for certain aircraft (Just in case you operate a flying school!).

Qualified film, television and live theatrical productions may now be eligible for the increased first-year bonus depreciation percentage. The IRS definition of property eligible for 100 percent bonus depreciation was expanded under the new laws to include qualified film, television and live theatrical productions as types of qualified property that are eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after Sept. 27, 2017, if all of the following conditions are met:

  • The property was not used by the taxpayer at any time before acquiring it.
  • The property was not acquired from a related party or from a component member of a controlled group of corporations.
  • The basis of the used property is not calculated in whole or in part by reference to the adjusted basis of the property in the hands of the seller.
  • The basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
  • The cost of the used qualified property eligible for bonus depreciation doesn’t include any carryover basis of the property, for example in a like-kind exchange or involuntary conversion.

Under the new law, there are certain types of property which are not eligible for bonus depreciation including any property used in a trade or business that has floor-plan financing (i.e. financing secured by motor vehicle inventory that a business sells or leases to retail customers.).

Additional changes to depreciation limitations on cars may affect you. Depreciation deductions related to passenger vehicles are also subject to new rules under the TCJA. For vehicles in use after Dec. 31, 2017, if you don’t claim the expense as bonus depreciation, the allowable depreciation deduction amounts are:

  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

If you claim the 100 percent bonus depreciation, the allowable depreciation deductions are:

  • $18,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

Real estate property is also subject to new depreciation rules. Some of the highlights of these rules which may apply to freelancers: The TCJA maintains the general recovery period of 39 years for nonresidential real property and 27.5 years for residential rental property in use after Dec. 31, 2017. The IRS has also made changes to qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property all of which are subject to a 15-year recovery period under the new law.

Additional depreciation deductions can mean a lower tax bill for yourbusiness. The new rules under the TCJA mean that you could reduce your tax bill significantly with additional depreciation deductions, especially if you use the bonus depreciation rule where you can. Keep in mind that the new law increases the maximum deduction from $500,000 to $1 million and the phase-out threshold from $2 million to $2.5 million, too. As with most tax regulations there are some nuances to these rules which you may want to check into with a tax professional in our New York City CPA office be sure that they are applicable to your particular situation.